FFH has reported prelim q1 results

[Daphne]

(Note: All dollar amounts in this news release are expressed in U.S. dollars except as otherwise noted. The financial information reflects preliminary indications and current estimates of key developments of the company’s first quarter of 2021 prepared using the recognition and measurement requirements of International Financial Reporting Standards (“IFRS”) except as otherwise noted, and are unaudited.)

TORONTO, April 14, 2021 (GLOBE NEWSWIRE) -- Fairfax Financial Holdings Limited (TSX: FFH and FFH.U) announces preliminary unaudited financial information which will be finalized for the company’s first quarter of 2021 unaudited financial results, including information reflecting key developments.

“As we did a year ago, we are providing our shareholders with preliminary indications of some key developments for Fairfax’s first quarter of 2021 financial results. Our insurance companies continued to have strong underwriting performance in the first quarter of 2021 with a consolidated combined ratio of approximately 96%, favourable reserve development and strong growth in gross premiums written of approximately 17%. Our investments increased significantly with net gains on investments currently estimated at approximately $875 million for the first quarter of 2021, primarily reflecting net unrealized gains from our common stock portfolio. Mark-to-market movements on certain of our non-insurance consolidated investments and investments in associates, which will not be reflected in our financial statements, also increased significantly in the first quarter of 2021 by approximately $1 billion.  We remain focused on continuing to be soundly financed and expect that, at the close of our RiverStone Barbados transaction, we will have paid off our credit facility completely and will have cash and marketable securities in the holding company of approximately $1.3 billion,” said Prem Watsa, Chairman and Chief Executive Officer.

Key financial information for the first quarter of 2021, based on preliminary indications and current estimates but recognizing that the preparation of the company’s first quarter financial statements is not finalized, includes the following:

• We currently expect gross premiums written to increase from the first quarter of 2020 by approximately 17% to approximately $5.5 billion. The company’s insurance and reinsurance operations continued to have strong underwriting performance in the first quarter of 2021, with a consolidated combined ratio of approximately 96% and net favourable prior year reserve development, which will result in solid operating income during the quarter despite the impact of the U.S. winter storms. 
   
• Net gains on investments of approximately $875 million will primarily reflect net unrealized gains on the company’s equity and equity-related holdings, partially offset by net unrealized losses on bonds. 
   
• At March 31, 2021 the excess of fair value over adjusted carrying value of non-insurance investments in associates will be approximately $225 million, which is an improvement of approximately $684 million from the deficiency of $458.5 million at December 31, 2020. 
   
• At March 31, 2021 the excess of fair value over adjusted carrying value of certain consolidated non-insurance subsidiaries will be approximately $125 million, which is an improvement of approximately $329 million from the deficiency of $204.1 million at December 31, 2020.

Fairfax is a holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance and the associated investment management.       

For further information contact:	John Varnell
Vice President, Corporate Development
(416) 367-4941

 

In presenting the company’s preliminary unaudited financial information in this news release, management has included the measure “pre-tax excess (deficiency) of fair value over adjusted carrying value”. The company considers its non-insurance investments in associates and certain consolidated non-insurance subsidiaries to be portfolio investments, and the excess (deficiency) of fair value over adjusted carrying value of these investments, while not included in the calculation of book value per share, is regularly reviewed by management as an indicator of investment performance. The fair values and adjusted carrying values of the company’s investments in non-insurance associates represent their fair values and carrying values that will be presented in note 6 (Investments in Associates) to the interim consolidated financial statements for the three months ended March 31, 2021, with investments in associates primarily held by Recipe, Fairfax India and Thomas Cook India excluded. The fair values of the company's investments in certain consolidated non-insurance subsidiaries are calculated as the company's pro rata ownership share of each subsidiary's market capitalization, as determined by traded share prices at the financial statement date. The adjusted carrying values of those subsidiaries represent each subsidiary's total equity that will be included in the company's interim consolidated financial statements for the three months ended March 31, 2021, less the respective carrying value of each subsidiary's non-controlling interests.

Certain statements contained herein may constitute forward-looking statements and are made pursuant to the “safe harbour” provisions of the United States Private Securities Litigation Reform Act of 1995 and in any applicable Canadian securities regulations. Such forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Fairfax to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to: a reduction in net earnings if our loss reserves are insufficient; underwriting losses on the risks we insure that are higher or lower than expected; the occurrence of catastrophic events with a frequency or severity exceeding our estimates; changes in market variables, including interest rates, foreign exchange rates, equity prices and credit spreads, which could negatively affect our investment portfolio; risks associated with the global pandemic caused by COVID-19, and the related global reduction in commerce and substantial downturns in stock markets worldwide; the cycles of the insurance market and general economic conditions, which can substantially influence our and our competitors’ premium rates and capacity to write new business; insufficient reserves for asbestos, environmental and other latent claims; exposure to credit risk in the event our reinsurers fail to make payments to us under our reinsurance arrangements; exposure to credit risk in the event our insureds, insurance producers or reinsurance intermediaries fail to remit premiums that are owed to us or failure by our insureds to reimburse us for deductibles that are paid by us on their behalf; our inability to maintain our long term debt ratings, the inability of our subsidiaries to maintain financial or claims paying ability ratings and the impact of a downgrade of such ratings on derivative transactions that we or our subsidiaries have entered into; risks associated with implementing our business strategies; the timing of claims payments being sooner or the receipt of reinsurance recoverables being later than anticipated by us; risks associated with any use we may make of derivative instruments; the failure of any hedging methods we may employ to achieve their desired risk management objective; a decrease in the level of demand for insurance or reinsurance products, or increased competition in the insurance industry; the impact of emerging claim and coverage issues or the failure of any of the loss limitation methods we employ; our inability to access cash of our subsidiaries; our inability to obtain required levels of capital on favourable terms, if at all; the loss of key employees; our inability to obtain reinsurance coverage in sufficient amounts, at reasonable prices or on terms that adequately protect us; the passage of legislation subjecting our businesses to additional adverse requirements, supervision or regulation, including additional tax regulation, in the United States, Canada or other jurisdictions in which we operate; risks associated with government investigations of, and litigation and negative publicity related to, insurance industry practice or any other conduct; risks associated with political and other developments in foreign jurisdictions in which we operate; risks associated with legal or regulatory proceedings or significant litigation; failures or security breaches of our computer and data processing systems; the influence exercisable by our significant shareholder; adverse fluctuations in foreign currency exchange rates; our dependence on independent brokers over whom we exercise little control; impairment of the carrying value of our goodwill, indefinite-lived intangible assets or investments in associates; our failure to realize deferred income tax assets; technological or other change which adversely impacts demand, or the premiums payable, for the insurance coverages we offer; disruptions of our information technology systems; assessments and shared market mechanisms which may adversely affect our insurance subsidiaries; and adverse consequences to our business, our investments and our personnel resulting from or related to the COVID-19 pandemic. Additional risks and uncertainties are described in our most recently issued Annual Report which is available at  www.fairfax.ca and in our Supplemental and Base Shelf Prospectus (under “Risk Factors”) filed with the securities regulatory authorities in Canada, which is available on SEDAR at www.sedar.com. www.sedar.com. Fairfax disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable securities law.

[Xerxes]

Not sure of these two statements are overlapping.

Does it mean a combined ~$1.875 billion net gain in Q1, with an understanding a good portion wont go through the P&L.

i guess will know tomorrow

 

"Our investments increased significantly with net gains on investments currently estimated at approximately $875 million for the first quarter of 2021, primarily reflecting net unrealized gains from our common stock portfolio. Mark-to-market movements on certain of our non-insurance consolidated investments and investments in associates, which will not be reflected in our financial statements, also increased significantly in the first quarter of 2021 by approximately $1 billion. "

[TwoCitiesCapital]

My high level read is book value will be up by the $875+ million figure plus profits from insurance. 

The other gains are real gains, but won't be gains captured in book value, just like the prior deficit wasn't captured in book value. 

Still, with that gain, Fairfax is still at like 0.7x boon and even cheaper considering they now have $200-300 million of gains not captured there. Despite recent gains that have been very strong, Fairfax is still dirt cheap 

Edited April 15, 2021 by TwoCitiesCapital

[Viking]

Nice to see Fairfax starting to outperform expectations. This makes it two quarters in a row. And the beats have been significantly better (not just a little). 
1.) insurance: 96%CR is good; growth of 17% is very good

2.) net gains on investments is very good

3.) fair value of associates and consolidated stocks (in aggregate) is now comfortably over carrying value. This makes reported book value more meaningful (and lessens the need for the stock to sell below book value).

And the equity holdings (in aggregate) do not look crazy overvalued at March 31 prices... lots more upside to be had in 2021 and 2022.

In terms of the stock price, the big question is when do we see shares trade back above book value? Fairfax is currently trading at the low end of where it was trading pre-pandemic. Yet its business (insurance and investments) look to be in much better shape. With lots of tailwinds...

Edited April 15, 2021 by Viking

[petec]

3 hours ago, TwoCitiesCapital said:

My high level read is book value will be up by the $875+ million figure plus profits from insurance. 

The other gains are real gains, but won't be gains captured in book value, just like the prior deficit wasn't captured in book value. 

Still, with that gain, Fairfax is still at like 0.7x boon and even cheaper considering they now have $200-300 million of gains not captured there. Despite recent gains that have been very strong, Fairfax is still dirt cheap 

How do you get to 0.7x? 
 

BVPS was 478 in q4. Add 47 of gains from marks to market and you’re at 525. Share price is 454. That’s 0.86x. It would take a lot of underwriting profit to get you to 0.7x, when you consider holdco costs etc., no?

 

Also remember there’s a ton of goodwill. I think it’s money good, but it does distort the BV comparison with other insurers that don’t have it. 

[Viking]

The dividend paid in Q1 will also be reducing BV by $10 when they report. 

[jfan]

I was browsing through their website and under corporate it states the Wade Burton is hwic chief investment officer. Has that always been the case?

 

[petec]

2 hours ago, jfan said:

I was browsing through their website and under corporate it states the Wade Burton is hwic chief investment officer. Has that always been the case?

 

No, that was done a couple of years back. Rather meaningless - Prem still controls the majority. 

[TwoCitiesCapital]

8 hours ago, petec said:

How do you get to 0.7x? 

BVPS was 478 in q4. Add 47 of gains from marks to market and you’re at 525. Share price is 454. That’s 0.86x. It would take a lot of underwriting profit to get you to 0.7x, when you consider holdco costs etc., no?

Also remember there’s a ton of goodwill. I think it’s money good, but it does distort the BV comparison with other insurers that don’t have it. 

You're right. I think I was taking the book value in CAD in adding to it the +$30 USD from the $875 million gain - so just sloppy work on my part. 

 

[StubbleJumper]

Nothing in this release that is particularly surprising.  Viking has done a great public service for this forum by maintaining his spreadsheet to track changes in market value for the various categories of investments (ie, those that are marked, those that are equity accounted and those which are consolidated).

The interesting part of the pre-announcement for me was actually the underwriting.  Gross Written has continued to increase at a ridiculous rate, which is a happy place to be.  But, what's up with that CR?  With a CR of 96, it looks to me as if there's about 3 or 4 cat points embedded in it.  I understand that there were probably some claims from the winter storms in Texas, but usually Q1 is a pretty benign quarter.  Or, perhaps there was less favourable development than in 2020?  The other thing that will be interesting will be to see how/whether FFH's use of reinsurance has changed, as they seem to be retaining progressively less premium over the past 6 or 8 quarters.

From a process perspective, I found that it was interesting that Prem elected to pre-announce the results this year.  I understand why it was a necessary or desirable thing to have done in 2020, when markets were jittery, FFH had taken several body-blows in its equity portfolio, and there was much uncertainty of the impact of covid on insurance claims.  Pre-announcing in that context was useful and valuable disclosure for market participants. But in 2021?  Not so much.  I wonder whether this will become an annual thing on a going-forward basis...

 

 

SJ

[Daphne]

Just answered re BB. Couldn’t sell before March 1 due to regulatory limiting convertible transaction six months earlier

[petec]

37 minutes ago, StubbleJumper said:

Nothing in this release that is particularly surprising.  Viking has done a great public service for this forum by maintaining his spreadsheet to track changes in market value for the various categories of investments (ie, those that are marked, those that are equity accounted and those which are consolidated).

The interesting part of the pre-announcement for me was actually the underwriting.  Gross Written has continued to increase at a ridiculous rate, which is a happy place to be.  But, what's up with that CR?  With a CR of 96, it looks to me as if there's about 3 or 4 cat points embedded in it.  I understand that there were probably some claims from the winter storms in Texas, but usually Q1 is a pretty benign quarter.  Or, perhaps there was less favourable development than in 2020?  The other thing that will be interesting will be to see how/whether FFH's use of reinsurance has changed, as they seem to be retaining progressively less premium over the past 6 or 8 quarters.

From a process perspective, I found that it was interesting that Prem elected to pre-announce the results this year.  I understand why it was a necessary or desirable thing to have done in 2020, when markets were jittery, FFH had taken several body-blows in its equity portfolio, and there was much uncertainty of the impact of covid on insurance claims.  Pre-announcing in that context was useful and valuable disclosure for market participants. But in 2021?  Not so much.  I wonder whether this will become an annual thing on a going-forward basis...

 

 

SJ

I thought the same re the CR.

 

I wonder if the preannouncement was to allow them top discuss results at the AGM. They have basically run through the same numbers on the call and that might have been a legal grey area without a preannouncement.

[Viking]

The big takeaway for me from listing to the annual meeting Q&A: we can offially put a pitchfork in the 7 bad year stretch. There were 2 key drivers of the underperformance the past 7 years:

1.) terrible use of derivatives

2.) poor purchase decisions on a bunch of equity positions

Moving forward, no more shorting of indexes or individual names. Prem also admitted they had made mistakes in the recent past on some of the equity purchases (poor management); less likely this will be repeated in the future (with quality management being a more important part of the purchase decision). 

Edited April 15, 2021 by Viking

[Cigarbutt]

^About the Q1 combined ratios of years past:

avg last 5yrs: 95.5, last 3yrs: 96.6

avg cat CR points last 5yrs: 2.1, last 3yrs: 2.2

It is expected that this year's cat CR points will be slightly higher than years past ?around 3.5-4, suggesting slightly better underwriting in a hardening market.

[petec]

1 hour ago, Viking said:

The big takeaway for me from listing to the annual meeting Q&A: we can offially put a pitchfork in the 7 bad year stretch. There were 2 key drivers of the underperformance the past 7 years:

1.) terrible use of derivatives

2.) poor purchase decisions on a bunch of equity positions

Moving forward, no more shorting of indexes or individual names. Prem also admitted they had made mistakes in the recent past on some of the equity purchases (poor management); less likely this will be repeated in the future (with quality management being a more important part of the purchase decision). 

Which of their investments did he say was poorly managed? I missed that.

[Viking]

Prem did not name specific companies. I was referencing comments Prem made later in the Q&A when asked a question about non-insurance acquisitions. He said they had ‘deviated’ in the past. He was talking about the importance of management and went on to use Atlas and Stelco as recent examples of where they had gotten the management thing right. 

They had a run of a few years where they bought poor businesses with poor/questionable management and often kept throwing more money at them: Blackberry, Resolute Forest Products, and Recipe are a few that come quickly to mind that they still own. APR and Fairfax Africa had complete management overhauls in the past 12 months. 

I compare these past purchases to the more recent Atlas and Stelco purchases. Perhaps i am just hearing what i want to hear. But it looks to me like Fairfax has tweaked their value investing methodology and are placing a higher weighting on management when making their very large equity purchases.

I think Fairfax has also learned over the past 7 or 8 years that they are not turnaround experts (at their investment office). Prem talks about how they run a lean head office.

[Viking]

I wonder if the analyst community will wait for the official release from Fairfax in May to update their reports to reflect Q1 results. RBC recently updated all their estimates for P&C insurers for Q1. Given the very strong results in the pre-release from Fairfax my guess is we will see some increases in price targets at some point in the next few weeks. For Fairfax here is what RBC was forecasting for Q1:

- CR = 99% (actual = 96%)

- net written premium growth = 3.6% (gross actual = 17%)

- eps = $7.56/share (my guess is eps will be closer to $30-$35/share, given $875 in mark to market investment gains and 96% CR)

[petec]

2 hours ago, Viking said:

Prem did not name specific companies. I was referencing comments Prem made later in the Q&A when asked a question about non-insurance acquisitions. He said they had ‘deviated’ in the past. He was talking about the importance of management and went on to use Atlas and Stelco as recent examples of where they had gotten the management thing right. 

They had a run of a few years where they bought poor businesses with poor/questionable management and often kept throwing more money at them: Blackberry, Resolute Forest Products, and Recipe are a few that come quickly to mind that they still own. APR and Fairfax Africa had complete management overhauls in the past 12 months. 

I compare these past purchases to the more recent Atlas and Stelco purchases. Perhaps i am just hearing what i want to hear. But it looks to me like Fairfax has tweaked their value investing methodology and are placing a higher weighting on management when making their very large equity purchases.

I think Fairfax has also learned over the past 7 or 8 years that they are not turnaround experts (at their investment office). Prem talks about how they run a lean head office.

I do believe they have learned lessons. I'm just not sure I'd say management was their key mistake in the past.

The big difference between Stelco and RFP is that Stelco is a low cost player with no debt.

The big difference between Atlas and RFP is that Atlas has contracted cash flows to support its debt.

Management will be a big part of why Stelco and Atlas will work out well for Fairfax. I absolutely believe that. But I am not so sure management is the key reason why RFP failed. Maybe I don't know it well enough.

I am not disagreeing with you or Prem. I'd just have been fascinated to hear Prem name the companies he thought were badly managed! But I guess that would be pretty poor form in a public setting, and not like Prem.

Either way, I really like the current portfolio. 

[Daphne]

RFP is up 13% today and 60% in last six weeks.  Pric of lumber is through the roof.

[investmd]

My takeaways from 2020 AGM:

1. Prem admitted some mistakes (which is a change), but remains as bullish on FFH as ever. Everything is great. Companies are great, people are all awesome. Got to hand it to Prem for consistency in Optimism
2. Bought corp bonds at 4% yield and sold half of them at 1% yield 
3. Didn't sell BB - conv. explanation of securities regulation. Not clear whether they would have sold if spike event had occurred outside of the 6 month prohibition on trading window
4. Stock positions increased 18% in Q1
5. Insurance underwriting business performing v. all and flow compounding at a consistently healthy rate

[jfan]

It was interesting how Prem gives alot of air time to his insurance managers to discuss their business segments. Although he gives credit to his investment team, it would be encouraging that he has Wade and Lawrence to speak about their philosophy, learnings as well. I know that Buffett doesn't, but Fairfax isn't Berkshire. Perhaps next year?

[Viking]

22 hours ago, Daphne said:

RFP is up 13% today and 60% in last six weeks.  Pric of lumber is through the roof.

It is crazy what is happening to lumber and steel prices.

RFP closed Friday at US$14.79. March 31 its share price closed at $10.95. Fairfax owns about 30.5 million shares so its position is up close to $90 million in the last 17 days. Even though Fairfax equity positions were up significantly in Q4 and Q1 it appears Q2 is off to a nice start.

Total position in RFP is now worth about $450 million. Its carrying value is $166 million; it is an associate/consolidated holding so gains in stock price are not mark to market.

i wonder what the end game is with the cyclical holdings like RFP and Stelco. Long term hold? Or if share prices increase further from here do they look to monetize? 

As has been mentioned by Petec, both Resolute and Stelco will be significantly increasing their dividend in 2021 as they return some of their spiking free cash flow to shareholders.

Edited April 17, 2021 by Viking

[petec]

If RFP keeps buying back stock smartly in troughs, FFH will control those cash flows soon enough...

[StubbleJumper]

AbitibiBowater has been a dog.  So, now that the share price is soaring, what's the opportunistic exit-strategy?  Prem has explained why FFH could not dump its BB position when the price was high, but what will be the excuse if they don't dump RFP at the top of the commodity cycle?

[Xerxes]

Not easy with 30 million shares and you got Chou that also owns 4.5 million. Both combined 42% of the company. Who is going to trim first ? or are they looking at each other to see who shoots first ...

I dont know if this data is correct from Yahoo Finance:

volume is at 3,733,434 shares, but average volume was at 634,903. There should enough volume to absorb a few trim here and there. 

 

Edited April 17, 2021 by Xerxes