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Fairfax 2022


cwericb

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Well someone had to start it. 🙂

 

Wondering about the impact climate change will have on the insurance industry over 2022 and the next few years.  Not only are we having more weather related incidents, but those events are becoming more and more severe. Floods, fires, and winds all seem to be setting records every month.

 

We are in a hard market, but is this an indication of the industry preparing for anticipated increased future claims? If so, would that indicate increased premiums are not funding increased profits but simply funding increased claims in the future.

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1 hour ago, cwericb said:

Well someone had to start it. 🙂

 

Wondering about the impact climate change will have on the insurance industry over 2022 and the next few years.  Not only are we having more weather related incidents, but those events are becoming more and more severe. Floods, fires, and winds all seem to be setting records every month.

 

We are in a hard market, but is this an indication of the industry preparing for anticipated increased future claims? If so, would that indicate increased premiums are not funding increased profits but simply funding increased claims in the future.

 

Replacement costs are also rising as material, labour, and commodity prices are up.  I would imagine insurance premiums will continue rising into 2023 and possibly 2024 for most lines of insurance other than specialty.  Cheers!

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There is a reason the current hard market is running longer than most thought it would. Perhaps we see it extended through 2022. Why?

1.) inflation is ripping. This has to be resulting in costs that are (and will be higher) than expected when the policy was written.

2.) catastrophe losses remain elevated (partly tied to inflation)

3.) bond yields remain stubbornly low


Most companies are saying that price increases are running in excess of current loss cost trends. This has been the case for the past couple of years. But as expected future costs go higher yet it is reasonable to assume more price increases will be needed to stay ahead of the cost increase trends. If companies are correct we should see a slowly improving CR in 2022.

 

As long as the hard market continues i am not concerned. 
—————

My guess is insurance companies are rapidly embracing technology to model loss trends. As with other industries this might be the variable that separate the winners from the rest of the pack.

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So let’s see if I have this right.

 

Increasing catastrophic weather events, rising prices for materials and labour, combined with oncoming inflation, insurance premiums must rise to cover those factors.

 

So like most businesses, profit is a function of cost, ie if I sell a widget for $3.00 and my margin is 33% I make $1.00. But if my cost increases to $6.00 and margin is still 33% I now make $2.00 for selling the same widget. Assuming that insurance functions in a similar manner, rising insurance premiums to cover pay outs should result in increased profits?

 

I realize the above is a rather simplistic view, but as long as premiums rise in advance of rising pay outs, then the future of the insurance business looks quite profitable, assuming it doesn’t become unaffordable?

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10 year treasury continues march up to 1.76% today - i think we will be over 2% this year - another catalyst for Fairfax with 44% of Fairfax portfolio in cash and short term invest that they are waiting to deploy to higher yielding fixed income opportunities which could be not too far around the corner 🙂

 

 

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1 hour ago, glider3834 said:

10 year treasury continues march up to 1.76% today - i think we will be over 2% this year - another catalyst for Fairfax with 44% of Fairfax portfolio in cash and short term invest that they are waiting to deploy to higher yielding fixed income opportunities which could be not too far around the corner 🙂

 

 


Glider, rising bond yields will be something to watch with Fairfax and all insurance companies. There will be two impacts:

1.) in the near term the hit to earnings and BV as rising bond yields lower value of bonds held (Fairfax has very low duration so the hit to them should be much less than most insurers).

2.) opportunity to redeploy short term holdings into bonds with higher yield. Again, Fairfax is better positioned than most insurers in this regard. 

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It will be interesting to see what FFH has done with its cash and fixed income portfolio.  My sense is that they'll be waiting for rates to rise a bit more before making meaningful changes to duration, but there will at least be some slightly better return opportunities for the short-term investments.  At this point, perhaps two-year treasuries are the compromise position that delivers some yield while allowing the long treasuries to return to sane prices.  Even reinvesting $5b into the 2-yr at current rates would probably bump interest income by $25m/yr or so.  It still doesn't take you to the 3%+ that you'd like to see, but every bit helps....

 

 

SJ

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For those interested, Atlas Mara (which FFH bought out of FAH as part of the Helios transaction) is in the process of being dismantled. Several assets, including the main one (Union) have been sold. 

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44 minutes ago, Xerxes said:

between the x-dividend date late next week and the Q4 results in mid-Feb, some steam should come off, as flippers move on greener pastures 

 

 

Well, that's an interesting question, isn't it?  The X-D just means US$10 in our pocket.  But, what of the Q4 that should be released around Valentine's Day (or Superbowl)?  What kind of adjusted BV do you think that FFH will report?  After adjusting for Digit, the SIB, and the US$300m in MTM gains that @Viking shared with us earlier in the month, should be easily US$600, even after the dividend right?  Well, today the market has it at US$515.  That's what, ~0.85x book?

 

Not sure how much steam will come off when those numbers come out.  If steam comes off, do we end up back at 0.75x book?

 

 

SJ

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That was my point, the steam will come off between those data points (ex-dividend and Q4 results), because Q4 will be accretive to BV.

There are a lot of folks that are just playing the Christmas jumbo dividend round trip. (i.e. not taking risk to wait to see Q4 results)

Edited by Xerxes
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^^

The more it goes down, it only means that if you buy ARK you are getting a higher and higher than 45% compounded growth rate in their 5 year plan.

Based on their intrinsic value.

 

It is RRSP season, for 2022, and i need to chose in the next few months between adding to FFH, adding to GOOG, adding to RTX .... and starting a new position in Lockheed Martin. Or a combination of these four. 

 

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3 hours ago, Xerxes said:

between the x-dividend date late next week and the Q4 results in mid-Feb, some steam should come off, as flippers move on greener pastures 

No opinion on what’s driving the recent runup, and I honestly don’t care. The factors of short term movements are more a matter of speculation and/or Mr. Market’s mood swings. Longer term, market price and book value are converging (though not in a straight line) such that, eventually, the price is going to get to or beyond BV. The questions are…what will BV be when this happens and when will it happen? It may be six months down the road and US$645, or three years down the road at $825. The fewer errors that are made (ill-advised company purchase, big investment decision gone bad, etc.) the sooner it will happen and the higher the BV once it gets there. 


So, the past month or so have been nice, but it’s noise. Just want to see FFH keep executing and avoid unforced errors.


-Crip
 

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56 minutes ago, Crip1 said:

No opinion on what’s driving the recent runup, and I honestly don’t care. The factors of short term movements are more a matter of speculation and/or Mr. Market’s mood swings. Longer term, market price and book value are converging (though not in a straight line) such that, eventually, the price is going to get to or beyond BV. The questions are…what will BV be when this happens and when will it happen? It may be six months down the road and US$645, or three years down the road at $825. The fewer errors that are made (ill-advised company purchase, big investment decision gone bad, etc.) the sooner it will happen and the higher the BV once it gets there. 


So, the past month or so have been nice, but it’s noise. Just want to see FFH keep executing and avoid unforced errors.


-Crip
 

^^^

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6 hours ago, StubbleJumper said:

 

 

Well, that's an interesting question, isn't it?  The X-D just means US$10 in our pocket.  But, what of the Q4 that should be released around Valentine's Day (or Superbowl)?  What kind of adjusted BV do you think that FFH will report?  After adjusting for Digit, the SIB, and the US$300m in MTM gains that @Viking shared with us earlier in the month, should be easily US$600, even after the dividend right?  Well, today the market has it at US$515.  That's what, ~0.85x book?

 

Not sure how much steam will come off when those numbers come out.  If steam comes off, do we end up back at 0.75x book?

 

 

SJ


2021YE BV north of US$600 sounds reasonable to me too. Stock hardly looks expensive trading around $515 = 0.85xBV. I think US$700 is a reasonable (low) target for YE 2022 BV (absent a 20% drop in the stock market). At 0.9xBV = YE stock price = $630 which would be a +20% return from where the stock is trading today.

 

Review of a few of the ‘fundamentals’:

1.) hard market driving double digit top line and lower CR

2.) bond portfolio is positioned very well for rising rates

3.) equity portfolio is positioned very well: Atlas, Eurobank, commodity plays (Stelco, RFP, EXCO)

4.) FFH TRS poised to add to earnings

5.) Digit IPO? This would be a big time catalyst given its likely size ($3-4 billion?)
6.) post omicron pick up in international travel will be very good for BIAL; potential IPO of Anchorage?

7.) more share buybacks, with the pace driven by quarterly earnings

 

Another catalyst will be improvement in sentiment with investors. Fairfax has just completed a superb 2021. 2022 is looking solid. Prem’s letter, and rightly so, will lay out all the many wins in 2021 and expand on the many good things going on under the hood at Fairfax. The narrative will improve. Investment advisors will be ok putting a small amount of clients $ into Fairfax. And the PE multiple will likely expand. (Having an in-person annual meeting will also help…)

Edited by Viking
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After two days of 100K shares on the open we just had 400K shares trade on the open. I would have thought there should have been a bigger selloff if someone was trying to push that much volume of FFH stock like that. I wonder if FFH is laying off the TRS or maybe another investor wants more. 

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21 hours ago, StubbleJumper said:

 

 

Well, that's an interesting question, isn't it?  The X-D just means US$10 in our pocket.  But, what of the Q4 that should be released around Valentine's Day (or Superbowl)?  What kind of adjusted BV do you think that FFH will report?  After adjusting for Digit, the SIB, and the US$300m in MTM gains that @Viking shared with us earlier in the month, should be easily US$600, even after the dividend right?  Well, today the market has it at US$515.  That's what, ~0.85x book?

 

Not sure how much steam will come off when those numbers come out.  If steam comes off, do we end up back at 0.75x book?

 

 

SJ

Post auction, Q3 BVPS is $609 and BVPS @ FMV, using a 26% tax rate, is $675. So the stock is trading between .75X & .83X and that does not include Q4 MTM or Digit.

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The current market set up is feeling an awful lot like the late 90’s. A sub sector of the market (dot com and tech names back then) is getting absolutely destroyed today. Meanwhile, the cheap, old economy stuff (like FFH, BRK, banks, commodities etc) that was cheap for years gets its groove back and performs well over the next couple of years. 

Edited by Viking
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It is interesting to compare Fairfax’s current situation to what happened when we had the last big financial market dislocation in March of 2020. In March of 2020 Fairfax:

1.) insurance: losses from pandemic were unknown; lock downs were throttling business activity

2.) equities: many of Fairfax’s holdings were getting crushed (cyclicals, small cap, hospitality, financials, emerging markets).

3.) bonds: more of a mixed picture for Fairfax. Plunge in government yields would increase earnings and BV of holdings. Short spike in higher risk yields of higher risk bonds were an opportunity. Pain from much lower yields would only be felt in future.

 

Bottom line, Fairfax BV and earnings cratered. And the shares cratered.

 

Fast forward to today:

1.) insurance: hard market continues to roll. Economy expected to expand above trend in 2022. Prospects took very good.
2.) equities: we are seeing a bear market in speculative Nasdaq stocks. Fairfax’s top positions (Atlas, Eurobank, FFH TRS) are holding up well (so far)
3.) bonds: with yields across the curve spiking Fairfax should see interest income start to move higher again. There will be a hit to earnings and BV as current bond holdings are re-valued at quarter end (but Fairfax will be hit much less than most other insurance companies who have much more duration in their bond portfolio). If Fairfax is able to re-deploy some of its significant short term cash/holdings into longer dated bonds (yielding higher amounts) that will be a big, big win for shareholders (boosting interest income and locking in higher operating earnings in future years - something that would be highly valued by investment community).

 

Bottom line, Fairfax in a much better situation to withstand the current market turmoil. And that is likely why we are not seeing shares sell off aggressively. At least not yet 🙂 

 

 

Edited by Viking
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On 1/22/2022 at 6:22 PM, Viking said:

It is interesting to compare Fairfax’s current situation to what happened when we had the last big financial market dislocation in March of 2020. In March of 2020 Fairfax:

1.) insurance: losses from pandemic were unknown; lock downs were throttling business activity

2.) equities: many of Fairfax’s holdings were getting crushed (cyclicals, small cap, hospitality, financials, emerging markets).

3.) bonds: more of a mixed picture for Fairfax. Plunge in government yields would increase earnings and BV of holdings. Short spike in higher risk yields of higher risk bonds were an opportunity. Pain from much lower yields would only be felt in future.

 

Bottom line, Fairfax BV and earnings cratered. And the shares cratered.

 

Fast forward to today:

1.) insurance: hard market continues to roll. Economy expected to expand above trend in 2022. Prospects took very good.
2.) equities: we are seeing a bear market in speculative Nasdaq stocks. Fairfax’s top positions (Atlas, Eurobank, FFH TRS) are holding up well (so far)
3.) bonds: with yields across the curve spiking Fairfax should see interest income start to move higher again. There will be a hit to earnings and BV as current bond holdings are re-valued at quarter end (but Fairfax will be hit much less than most other insurance companies who have much more duration in their bond portfolio). If Fairfax is able to re-deploy some of its significant short term cash/holdings into longer dated bonds (yielding higher amounts) that will be a big, big win for shareholders (boosting interest income and locking in higher operating earnings in future years - something that would be highly valued by investment community).

 

Bottom line, Fairfax in a much better situation to withstand the current market turmoil. And that is likely why we are not seeing shares sell off aggressively. At least not yet 🙂 

I wonder what happened to the TRS. For the last few weeks we had a lot of shares trade on the open (from 100K to 400K) daily. I wonder if FFH decided to cash in on the TRS. I would have thought they would have waited somewhat for higher prices still, but you never know.

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