Fairfax 2021

[ERICOPOLY]

And an important point to make, is that the closing price of FFH in 1989 (start of 1990) was $18.75 USD.  Today the stock price is 24.42x that number.  Well, with  dividends reinvested the S&P500 purchased at start of 1990 has returned 25.13x.

 

Incredibly, after 32 years the FFH shareholder has only outperformed by the amount of the dividends paid.

 

I was a Junior in High School at the start of 1990.  Wow!

[Cigarbutt]

On 11/18/2021 at 8:53 PM, glider3834 said:

This has been bugging me & please disregard my last post on this one- here goes

 

Outstanding shares = Float (public) + Restricted shares https://www.wallstreetmojo.com/outstanding-shares-stocks/

 

 

(figures below in thousands)

 

Public float = 24,167 (below)

 

Share-based award -  dilutive 1,558 & anti-dilutive 1,269 = 2,827 (at 30 Sep-21 from Q3 '21 Interim report)

 

Outstanding shares = 26,994  (which is close to figure announced I think of 26,986)

 

So I suspect the basic outstanding shares number (used to calculate Fairfax's book value per share) has not changed too much from 30 Sep-21 - does the above sound right guys?

 

Initially (looking rapidly) i thought they had recently (since end of Q3) re-issued an unusual number of shares from the treasury share balance. But using the input below, when they report « shares issued and outstanding », they mean issued at date of reporting + the 799,230 already held through an ownership interest + treasury shares waiting to be re-issued.

From the 2020 annual info form:

 

So at end of 2020---)   27,124,093 + 1,548,000 = 26,176,506 + 799,230 + 1,696,357 = 28,672,093

Note: from a personal historical review to end of 2020, i get a cumulative net balance of treasury shares of 1,696,717 (versus 1,696,357 inferred from above).

From Q3 2021 (activity Q1-Q3)

Purchases for cancellation (137,923)

Treasury shares acquired (256,373)

Treasury shares re-issued 94,159

Net result = -300,137 shares

So, common stock effectively outstanding on September 30 2021: 25,876,369 (26,176,506-300,137)

So to go back to “shares issued and outstanding” on November 16^th 2021---)

= 25,876,369 + 799,230 + 1,696,357 (assuming no change in interim) = 28,371,956

Removing the multiple voting shares (-1,548,000) = 26,823,956

The difference between 26,823,956 (number above) and 26,986,170 reported on Nov 17 2021 (as of Nov 16 2021) represents the net activity of the total of 1- shares repurchased for cancellation, 2- total of shares repurchased for treasury and 3- total shares re-issued from treasury since end of Q3.

At any rate, from end of Q3 to Nov 16, nothing that unusual in terms of repurchase activity although I suspect that some share-based compensation vested and they likely interrupted the buyback activity until announcement.

Note: the difference (2,818,486) between stated shares and "public float" is related to the shares insiders own and control (2,703,348), see pages 46-47 from circular, a number to which one would have to add 115,138 to include “related parties”.

[Viking]

22 hours ago, glider3834 said:

I wanted to respond to the Fairfax owns 'cyclical crap' discussion points raised - thought better to do it in this thread & not the SIB thread.

 

If we just take a step back for a moment & think about the whole investment portfolio positioning - because I believe the strategy is really the critical piece.

 

1. Fairfax has 44% of their investments in cash & investments - higher interest rates will allow them to raise their fixed income allocation & increase interest income ( if you believe interest rates are headed higher then you would give this part of their strategy a tick & this is 44% of their total portfolio!). 

 

2. Fairfax is long India - this could be the most important & smartest strategic call by Prem over the years - India is now the number 1 emerging market economy in the world (sorry China!) & while their sharemarket looks decidedly frothy , India's economic prospects in terms of GDP growth etc look strong. Fairfax's Indian investments over the last few years have done exceptionally well.

 

Lets take Digit in this context -  India has GDP growth rate of 7% & has been growing premiums at high double digits (sounds a bit like US GDP growth rate in the 1960s & Geico when it started off when it had a similar growth rate - like Digit , Geico was challenging the status quo). 

 

Just on Digit because I am being cheeky here - media reports I have read suggest that Berkshire said no to Kamesh Goyal when he asked Berkshire to invest in Digit & Ajit Jain actually introduced Kamesh to Prem  & rest is history as they say.

 

3. Fairfax is long Greece (& Europe) - to be fair this has been a terrible call by Fairfax for many years - but it would be a mistake now for Fairfax to throw in the towel with Greece with this economy firmly set to rebound - the real estate market & property prices are on the rise, GDP in 7% area . Fairfax's strategic decision to maintain its exposure to Greece now IMO is the right one. Eurobanks results this week will be worth checking out - I am quietly optimistic - Eurobank has now become the opportunistic, value investor picking up stakes in banks in SE Europe where it sees opportunities, so its not just recovering, its now also in growth mode (a potential dividend on the way in 2022 ?? 

 

4. Fairfax is long resource plays - this is a bet on inflation IMO as well as the individual management teams & company prospects - insurers need to hedge their inflation risks in managing their liabilities

 

5. Fairfax is long real estate (eg Kennedy Wilson, Toys r us portfolio) - ditto on 4.

 

6. Fairfax is long covid recovery plays in travel, hospitality, dining & retail. Many of their investees that were hammered by covid, have used covid to digitise & streamline their cost bases. So coming out of covid have opportunity to deliver better earnings(eg Thomas Cook India, Recipe) - keep your eye on the profit from associates & non-insurance segment contribution to the Earnings statement over the next few quarters.

 

5. Fairfax is long Fairfax - their TRS position is effectively their 4th largest equity holding with around US$900 mil or so exposure ! They are also raising spare cash not to 'empire build' but to buyback their own stock - which company does Fairfax understand better than any other company as an investment - itself! This is a no brainer & good strategic call IMO.

 

6. Fairfax is an international insurer - owning equities in many different countries is also part of their strategy to match insurance liabilities in those different countries. 

 

7. Fairfax is an investor that likes to own concentrated positions & have a seat at the table - thats why you will see them holding big stakes & yes liquidity is a potential issue, however, in many cases these are also publicly listed companies (also Fairfax's cash & short-term investments effectively hedge their equity positions & provide liquidity during market downturns like 2020). Often the companies Fairfax has big stakes in are in that US$1-5 bil size area & perhaps that is just a function of Fairfax's market cap & investment universe, they can't afford a BNSF like Berkshire but what about Atlas with an ex-Berkshire manager at the helm??

 

There are other aspects to Fairfax's strategy including their preference for management teams who are strong capital allocators with good track records , but I wanted to highlight the above. 

 

I think we would all like them to dump BB at some point but is now the best point? The challenge here is that BB operating performance actually looks to be improving, Ivy looks very interesting  - are they being stubborn here - maybe - does BB need to be a great investment for Fairfax investment thesis to play out - not really IMO.

 

I have seen a few posts suggesting Fairfax should maybe have jumped into the MSFT,APPL type investments - I agree but its too late to now jump on that bandwagen - we are talking about stocks that have gone from multiples in the teens to the 30s, 40s (that continued multiple expansion with interest rates now starting to increase looks to be challenging from here) - Fairfax do have GOOG which is a smaller $50 mil or so position -I believe they won't shy away from a big tech company investment like GOOG at the right price (personally I wish they had taken a bigger slice of GOOG when they had the chance but anyway)

 

Worth noting two amongst Fairfax's top 10 investments that are non-cyclical- BDT partners largest investment is a beverage manufacturing business (I suspect this is Keurig Dr Pepper), Fairfax India's largest investment is in infrastructure - Bangalore Airport. 

 

Anyway there is my Sunday afternoon ramble

@glider3834, great overview of Fairfax’s various investments. Here are some additional thoughts:

1.) people who want to invest in Fairfax need to deal in reality. Fairfax is NOT Berkshire. And never will be. Fairfax IS Fairfax. (Glider, this comment is not directed at you but jumped out at me after reading your post.) They invest in resource plays (recent purchases of Stelco and Foran Mining). And cyclicals (recent purchase of Atlas). They are very international, with a heavy focus on emerging markets, especially India (recent investment was Digit). And they are creative sometimes pushing the envelope (recent TRS on FFH). 

 

2.) What really matters for investors is future results. Earnings. Growth in BV. Now that the straightjacket ($500 million per year in losses due to shorting) and other shackles from the past have largely been removed we are starting to see in 2021 what this company is capable of doing. And 2021 is shaping up to be a transformative year for Fairfax. +$100 in EPS. BV growth +20%. Net premiums earned +20%. Debt levels dramatically reduced. 7.5% share buyback. Additional $37/share Digit gain coming. Not too shabby. Looking forward to seeing what they can do in 2022. (My early guess is improved cash generation and lots more share buybacks…)

Edited November 22, 2021 by Viking

[bluedevil]

9 hours ago, Viking said:

They invest in resource plays (recent purchases of Stelco and Foran Mining). And cyclicals (recent purchase of Atlas).

 

Atlas is in a cyclical industry, but it is not a cyclical.  It has the equivalent of 12 years of 2021 revenue contractually locked in!

[Viking]

2 hours ago, bluedevil said:

 

Atlas is in a cyclical industry, but it is not a cyclical.  It has the equivalent of 12 years of 2021 revenue contractually locked in!

@bluedevil , Atlas is making the case that it is no longer a cyclical type holding. But the market clearly is not agreeing (yet). 
 

The problem Atlas has in the short term is it is still being valued like a cyclical. Except it is not currently earning the windfall profits its competitors are (who are doing business the old way). So its shares are lagging. And my guess is when shipping rates come down and the industry gets hammered Atlas will also get taken out behind the woodshed. Even though its business will be much more resilient. So investors don’t see the upside today but they do experience the downside tomorrow (look what happened to the share price in 2020 even though earnings barely budged).

 

As we are learning with Fairfax, narratives once established are VERY hard to change. Even when they are flat out wrong  The good news is Atlas’ earnings should pop every quarter from here moving forward for the next couple of years. At some point, as the earnings continue to roll in, Mr Market will start to pay enough attention that the ‘narrative’ will finally get updated. And then the stock will pop (higher earnings + higher multiple = stock price heaven). But this process could well take another year or even two. Patience will be needed.

 

Edited November 22, 2021 by Viking

[nwoodman]

19 minutes ago, Viking said:

At some point, as the earnings continue to roll in, Mr Market will start to pay enough attention that the ‘narrative’ will finally get updated. 

 

Edited 9 minutes ago by Viking

Another possible catalyst is they show their hand on the energy side of the business.   That should rev up the story tellers.

 

Don’t disagree with your comments on potential short term downside, that will be quite the opportunity if it eventuates.

[Viking]

4 minutes ago, nwoodman said:

Another possible catalyst is they show their hand on the energy side of the business.   That should rev up the story tellers.

 

Don’t disagree with your comments on potential short term downside, that will be quite the opportunity if it eventuates.

The really interesting thing to me is how the narrative changes when it is completely wrong. Pretty much impossible to predict the catalyst or the timing. So the problem for investors is trying to time things too cutely. 
 

PS: i added to my Atlas position today at $13.94. Cheap. Solid prospects. Well managed. What not to like?

[Xerxes]

The one hurdle to Atlas' appreciation is Fairfax and Washington Family outsized % ownership. Those shackles needs to be reduced so that the caged bird can fly again. But cannot be reduced at the moment because it is undervalued.

 

That hurdle was also there for Stelco from the PE shop point of view that owned a big stake in it. But the tsunami of cash coming in allowed Stelco to cash out the PE shop. So we are good there,

[glider3834]

4 hours ago, Viking said:

Except it is not currently earning the windfall profits its competitors are (who are doing business the old way). So its shares are lagging.

+1 agree - Atlas's share price would be a lot higher IMO if they chartered at daily rates - but thats not the long-term sustainable model they want (short-term pain for long-term gain - as their net eps continues to tick higher the share price should respond. I think these one-off non-cash charges of around $130 mil over Q2 & Q3, related to debt extinguishment, may also be obscuring their underlying operating earnings for those investors who are just working off the headline numbers. Agree just give it time ...

 

 

 

 

 

 

 

 

 

 

Edited November 22, 2021 by glider3834

[Viking]

How should Fairfax be valued?

 

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 mild tailwind to a big tailwind is another win for shareholders. 

 

The reason i am so positive on Fairfax today is because of all the tailwinds 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.) Runoff Expense: neutral (from modest headwind)

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 and 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.

Edited November 22, 2021 by Viking

[Viking]

2 hours ago, Viking said:

How should Fairfax be valued?

 

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 mild tailwind to a big tailwind is another win for shareholders. 

 

The reason i am so positive on Fairfax today is because of all the tailwinds 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.) Runoff Expense: neutral (from modest headwind)

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 and 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.

How should Fairfax be valued? Here is more detail (with numbers) on one of the items i highlighted in my initial post. 

—————-

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.

Edited November 23, 2021 by Viking

[Parsad]

On 11/21/2021 at 3:16 PM, ERICOPOLY said:

And an important point to make, is that the closing price of FFH in 1989 (start of 1990) was $18.75 USD.  Today the stock price is 24.42x that number.  Well, with  dividends reinvested the S&P500 purchased at start of 1990 has returned 25.13x.

 

Incredibly, after 32 years the FFH shareholder has only outperformed by the amount of the dividends paid.

 

I was a Junior in High School at the start of 1990.  Wow!

 

Long-term, maybe a portfolio of FFH and an S&P500 ETF is the way to go.  We know that FFH has little correlation to the S&P500 and tends to do better in down markets.  At the same time, most growth stocks are represented in the S&P500, which Fairfax rarely invests in. 

 

This is what I've told my brother to do for the family accounts if something happens to me...1/3rd FFH, 1/3rd S&P500 and 1/3rd cash to put to work when markets turn down in a big way.  It's simple, low-cost and effective for the long-term...while letting him and his family sleep at night.  Cheers!

[glider3834]

On 11/18/2021 at 12:10 AM, Parsad said:

Question for those more astute on these matters, will this mean a repricing of Odyssey on the balance sheet?  Based on IFRS, the new securities would reprice Odyssey's fair market value significantly higher than on the current financials, in turn increasing book value per share.  

@ParsadI will have a go at this

 

It looks like IFRS 3 gives the choice to recognise non controlling interest (NCI) at fair value or as a proportionate share (%) of net assets of the sub (Odyssey) . 

 

It looks like the more common approach is to choose the latter in this type of business combination- in that case then I suspect Fairfax's carrying value in Odyssey Group initially would increase by the difference between the $900 mil sale proceeds less proportionate share (approx 10%) of net assets of Odyssey acquired by NCI 

https://www.iasplus.com/de/binary/dttpubs/0807ifrs3guide.pdf

 

Here is how the accounting could look  https://www2.deloitte.com/content/dam/Deloitte/us/Documents/audit/ASC/Roadmaps/us-audit-a-roadmap-to-accounting-for-noncontrolling-interests-2020.pdf

 

I need to look further into the impact of the subsequent dividend that is paid to holdco by Odyssey to fund the share buyback.

 

Just my initial thoughts, we need to wait for Fairfax's reporting on these transactions to understand more about the new series of shares & impact on the financials, book value etc

 

 

 

 

 

 

 

 

 

 

 

 

 

Edited November 23, 2021 by glider3834

[glider3834]

3 hours ago, glider3834 said:

@ParsadI will have a go at this

 

It looks like IFRS 3 gives the choice to recognise non controlling interest (NCI) at fair value or as a proportionate share (%) of net assets of the sub (Odyssey) . 

 

It looks like the more common approach is to choose the latter in this type of business combination- in that case then I suspect Fairfax's carrying value in Odyssey Group would initially(ie before dividend) increase by the difference between the $900 mil sale proceeds less proportionate share (approx 10%) of net assets of Odyssey acquired by NCI 

https://www.iasplus.com/de/binary/dttpubs/0807ifrs3guide.pdf

 

Here is how the accounting could look  https://www2.deloitte.com/content/dam/Deloitte/us/Documents/audit/ASC/Roadmaps/us-audit-a-roadmap-to-accounting-for-noncontrolling-interests-2020.pdf

 

I need to look further into the impact of the subsequent dividend that is paid to holdco by Odyssey to fund the share buyback.

 

Just my initial thoughts, we need to wait for Fairfax's reporting on these transactions to understand more about the new series of shares & impact on the financials, book value etc

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ok so this is what I think could happen (& a lot of assumptions below so bear with me - I am simply trying to understand how these transaction could potentially impact shareholder's equity - we need to wait for final numbers in Fairfax's Q4 report !)

 

Pre-transaction - Fairfax owns 100% of Odyssey (lets estimate carrying value at $5.6 bil at 30 Sep-21)

 

Post transaction & post dividend (to Fairfax holdco) -

 

Fairfax owns 90% of Odyssey ( lets call them 'B shares') - estimate $5.04 bil

OMERS/CPPIB (Non-controlling interests) own 10% of Odyssey (lets call them 'A shares') - estimate $560 mil

 

So Odyssey total equity (after dividend paid to holdco) = $5.6 bil (ie so underwriting capital strength/shareholder surplus unaffected by this transaction) 

 

So in terms of estimated  impact for Fairfax's shareholder equity -common (again using assumptions above)

 

Fairfax new carrying value (Odyssey) 90% interest ('B shares') = $5.04 bil (decrease of $560 mil on pre-transaction value)

Fairfax Holdco cash = $900 mil increase (from Odyssey dividend)

 

Estimate Net increase Fairfax shareholder equity = $340 mil

 

So in this above scenario based on above assumptions, I am guessing there would be an increase (ignoring tax impacts if applicable) in shareholder equity for Fairfax (bottom line I would guess this Odyssey transaction is accretive to book value per common share - the actual $ amount still to be confirmed in Q4 report)

 

And this would be before taking into account the substantial issuer bid & normal course issuer bids that if successful, should also be accretive to book value per share.

 

Any comments/thoughts on the above guys? 

 

 

 

 

 

 

 

 

 

 

 

 

 

Edited November 23, 2021 by glider3834

[Parsad]

1 hour ago, glider3834 said:

 

 

Ok so this is what I think could happen (& a lot of assumptions below so bear with me - I am simply trying to understand how these transaction could potentially impact shareholder's equity - we need to wait for final numbers in Fairfax's Q4 report !)

 

Pre-transaction - Fairfax owns 100% of Odyssey (lets estimate carrying value at $5.6 bil at 30 Sep-21)

 

Post transaction & post dividend (to Fairfax holdco) -

 

Fairfax owns 90% of Odyssey ( lets call them 'B shares') - estimate $5.04 bil

OMERS/CPPIB (Non-controlling interests) own 10% of Odyssey (lets call them 'A shares') - estimate $560 mil

 

So Odyssey total equity (after dividend paid to holdco) = $5.6 bil (ie so underwriting capital strength/shareholder surplus unaffected by this transaction) 

 

So in terms of estimated  impact for Fairfax's shareholder equity -common (again using assumptions above)

 

Fairfax new carrying value (Odyssey) 90% interest ('B shares') = $5.04 bil (decrease of $560 mil on pre-transaction value)

Fairfax Holdco cash = $900 mil increase (from Odyssey dividend)

 

Estimate Net increase Fairfax shareholder equity = $340 mil

 

So in this above scenario based on above assumptions, I am guessing there would be an increase (ignoring tax impacts if applicable) in shareholder equity for Fairfax (bottom line I would guess this Odyssey transaction is accretive to book value per common share - the actual $ amount still to be confirmed in Q4 report)

 

And this would be before taking into account the substantial issuer bid & normal course issuer bids that if successful, should also be accretive to book value per share.

 

Any comments/thoughts on the above guys? 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thanks for the great response posts Glider...much appreciated!  Cheers!

[glider3834]

13 hours ago, Parsad said:

 

Thanks for the great response posts Glider...much appreciated!  Cheers!

all good 

[glider3834]

On 11/23/2021 at 9:55 AM, Viking said:

How should Fairfax be valued?

 

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 mild tailwind to a big tailwind is another win for shareholders. 

 

The reason i am so positive on Fairfax today is because of all the tailwinds 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.) Runoff Expense: neutral (from modest headwind)

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 and 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.

 

@Viking we can change 4. to 'Life insurance and Run-off' - see below

 

The assets, liabilities and results of operations of Eurolife's life insurance business were consolidated in the Life insurance and Run-off reporting segment and those of Eurolife's property and casualty insurance business were consolidated in the Insurance and Reinsurance - Other reporting segment

 

 

Edited November 23, 2021 by glider3834

[Viking]

On 11/22/2021 at 2:55 PM, Viking said:

How should Fairfax be valued?

 

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 mild tailwind to a big tailwind is another win for shareholders. 

 

The reason i am so positive on Fairfax today is because of all the tailwinds 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.) Runoff Expense: neutral (from modest headwind)

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 and 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.

How should Fairfax be valued? Here is more detail (with numbers) on another of the items i highlighted in my initial post. 

—————

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          $455 ($341 Sept 30) $17.50

2022 est.        $460.                            $19.20

 

Edited November 24, 2021 by Viking

[Thrifty3000]

@Viking  Do you know if anyone has been crazy enough to attempt a “normalized” look through earnings per FFH share forecast on the non-insurance investments? I mean, FFH’s portion of ATCO’s expected 2024 earnings alone is pretty interesting. If you add  just that one to your insurance ops’ per share contribution then the current share price starts looking pretty nuts.

 

[Viking]

26 minutes ago, Thrifty3000 said:

@Viking  Do you know if anyone has been crazy enough to attempt a “normalized” look through earnings per FFH share forecast on the non-insurance investments? I mean, FFH’s portion of ATCO’s expected 2024 earnings alone is pretty interesting. If you add  just that one to your insurance ops’ per share contribution then the current share price starts looking pretty nuts.

 

@Thrifty3000 that is a great question and the short answer is no. And i am not planning on doing that right now. 
 

i am thinking about how to capture all the equity holdings and i am likely going to focus on the individual holdings share price. So lets assume Atlas is trading at $14 at year end. Cheap. Given Atlas’ outstanding prospects i think it is a reasonable to expect the share price to increase 15% in 2022 to $16.10. Fairfax owns 126 million shares. $2.10 x 126 = $265 million in value creation for Fairfax. I am likely going to ignore exactly how this value flows through the financials. I don’t really care. My guess is Fairfax eventually will sell ALL of its equity holdings at some point in the future (i just don’t know when) so shareholders will see all of the value of a higher share price at some point in the future. 
 

i am simply trying to come up with some estimates that make sense and allow me to come up with an earnings number that is close to being accurate. I have said this many times… but the historical numbers for Fairfax are so messed up (full of noise) i don’t think many people understand what Fairfax might earn in 2022. We will see in about another week (i should be done my first take). And it will be great to hear what others think  

Edited November 24, 2021 by Viking

[Viking]

2 hours ago, glider3834 said:

 

@Viking we can change 4. to 'Life insurance and Run-off' - see below

 

The assets, liabilities and results of operations of Eurolife's life insurance business were consolidated in the Life insurance and Run-off reporting segment and those of Eurolife's property and casualty insurance business were consolidated in the Insurance and Reinsurance - Other reporting segment

 

 

Yes, i will make that change

 

i also just edited the Dividend and Interest post to match how Fairfax reports in their short form press releases. I am using their Feb releases for most of my YE numbers and the Nov press release for my Q3 numbers. This will keep all the various posts i do consistent in terms of my source material. And will also make future updates easy (using future Fairfax press releases).

[Dazel]

I think it is brilliant. Was involved in TRI (ThomsonReuters)tender offer a few years back (take a look for taxation) it’s was a great  move…they sold their financial unit and bought back through tender offer and then normal course issuer bid. The stock has doubled since the transaction.

I like being involved with smart people. Well done.

 

I believe that TRI was a return of capital because of the sale of the financial unit and the Fairfax transaction is likely the same because of the Odyssey Re sale…like I said smart people are fun! 
a pleasure as always Prem!

[Xerxes]

I think you are referring to the three-way transaction with Blackstone and LSE for Reuters' analytic division ?

[Viking]

On 11/22/2021 at 2:55 PM, Viking said:

How should Fairfax be valued?

 

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 mild tailwind to a big tailwind is another win for shareholders. 

 

The reason i am so positive on Fairfax today is because of all the tailwinds 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.) Runoff Expense: neutral (from modest headwind)

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 and 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.

How should Fairfax be valued? Here is more detail (with numbers) on another one of the items i highlighted in my initial post. I am not doing my deep dives in numeric order (i am going to bounce around).

—————

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 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.”

[glider3834]

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