Fairfax 2022

[Parsad]

24 minutes ago, This2ShallPass said:

With the pet insurance sale closing Oct 31, I'm hoping they announce a SIB in their earnings announcement. They have taken advantage of the hard market and if their own stock is as undervalued as we all believe, there's no justification (in my mind) to not prioritize buybacks now. Fairfax is very much out of favor with the market due to their past mistakes and they need to be their own catalyst..

 

 

 

It seems like many want buybacks, but we're in the midst of a massive correction in the credit markets.  That is usually when Fairfax makes some of their best investments in convertible debt placements.  It would be remiss to prioritize buybacks, if other opportunities present themselves that would potentially be far more rewarding.

 

Fairfax should be looking for the best opportunity out there.  If they can't find any, then they should buy back stock or distribute the capital.  But if markets offer great investments, buybacks would have to take a back seat.  That's just common sense.  Cheers!

[This2ShallPass]

8 minutes ago, Parsad said:

Fairfax should be looking for the best opportunity out there. 

Agreed, but they also need to prioritize long term shareholders who have really trusted them and have got 0% return over 10 years during a historic bull market. And do what they say or risk losing even more trust, Prem just said in Q2 buybacks are the main priority from the sale and has been talking about Teledyne forever. I don't see a better setup to do what Singleton did then now..

[Viking]

22 minutes ago, Parsad said:

 

It seems like many want buybacks, but we're in the midst of a massive correction in the credit markets.  That is usually when Fairfax makes some of their best investments in convertible debt placements.  It would be remiss to prioritize buybacks, if other opportunities present themselves that would potentially be far more rewarding.

 

Fairfax should be looking for the best opportunity out there.  If they can't find any, then they should buy back stock or distribute the capital.  But if markets offer great investments, buybacks would have to take a back seat.  That's just common sense.  Cheers!

i am reading pretty bullish commentary about super hard market in reinsurance. This looks to be an emerging opportunity. Not sure if Fairfax needs to fund anything meaningful here to be able to fully participate. I would support this sort of ‘investment’. Regardless, i also expect Fairfax to do something meaningful with share buybacks.

[StubbleJumper]

45 minutes ago, Viking said:

i am reading pretty bullish commentary about super hard market in reinsurance. This looks to be an emerging opportunity. Not sure if Fairfax needs to fund anything meaningful here to be able to fully participate. I would support this sort of ‘investment’. Regardless, i also expect Fairfax to do something meaningful with share buybacks.

 

My recollection is that ORH has plenty of underwriting capacity due to high capital levels, as the premiums to surplus ratio. Was lower than 1 at the beginning of the year.  They could write piles more reinsurance without hitting a capital constraint (and in fact this is what they've done in previous super hard markets).   If there's a sub that's been tight on capital, it's Crum, and reinsurance isn't really their business.

 

1 hour ago, Parsad said:

 

It seems like many want buybacks, but we're in the midst of a massive correction in the credit markets.  That is usually when Fairfax makes some of their best investments in convertible debt placements.  It would be remiss to prioritize buybacks, if other opportunities present themselves that would potentially be far more rewarding.

 

Fairfax should be looking for the best opportunity out there.  If they can't find any, then they should buy back stock or distribute the capital.  But if markets offer great investments, buybacks would have to take a back seat.  That's just common sense.  Cheers!

 

I'd say you need to break it down between capital that FFH needs for its insurance operations and that which it doesn't need.  The insurance subs can invest their float in those kinds of opportunities.  There would be no trouble at all to shift $3b or $5b out of treasuries and into convertible corporate bonds if the opportunity arises.  There's no requirement for the Holdco to do this when 95+% of the investment funds are in the subs.  But the holdco occasionally does hold a modest amount of capital that it doesn't really need for its insurance operations.  It's possible that a billion or so might flow up to the holdco this fall and next spring as a result of the asset sales (pet ins and resolute).  If this ends up being the case, it would be hard to imagine that they'd find a better investment than their own shares if current prices persist.

 

SJ

[glider3834]

C&F pet sale completed

 

https://finance.yahoo.com/news/independence-pet-group-completes-acquisition-144500058.html

Edited October 31, 2022 by glider3834

[Viking]

Just finished listening to the Chubb Q3 conference call. Some take aways:

- re-investment rate is currently 5.8%

- current portfolio yield is 3.4%

- significant unrealized loss in fixed income portfolio will accrete back to BV over 2 year period

- p&c market conditions continue to be quite favourable

—————

If Fairfax is able to get anywhere near a 5.8% re-investment rate we should see interest income continue to increase in a meaningful way. A 4% yield of their fixed income portfolio is not a crazy number (if new funds can be invested at an average 5.8% yield). $35 billion x 4% = $1.4 billion = @$60/share.

[Viking]

1 hour ago, glider3834 said:

C&F pet sale completed

 

https://finance.yahoo.com/news/independence-pet-group-completes-acquisition-144500058.html

@glider3834  GREAT NEWS! Let the speculation begin as to what they are going to do with the proceeds! 
1.) another dutch auction at YE for Fairfax shares

2.) re-invest into insurance/re-insurance subs to grow in hard market

3.) buy out minority partners (Allied)

4.) invest in equities

5.) all of the above (so no big dutch auction, just NCIB for share repurchases

6.) none of the above… what else?

[glider3834]

21 minutes ago, Viking said:

@glider3834  GREAT NEWS! Let the speculation begin as to what they are going to do with the proceeds! 
1.) another dutch auction at YE for Fairfax shares

2.) re-invest into insurance/re-insurance subs to grow in hard market

3.) buy out minority partners (Allied)

4.) invest in equities

5.) all of the above (so no big dutch auction, just NCIB for share repurchases

6.) none of the above… what else?

viking I hope its 1. 

 

[maxthetrade]

30 minutes ago, glider3834 said:

viking I hope its 1. 

Same here!

[nwoodman]

(6) IDBI Bank

EOI’s due in December, so my bet is it will be all quiet on the buyback front until the bid is awarded next year. I hope I am wrong!

 

https://www.forbesindia.com/article/take-one-big-story-of-the-day/idbi-bank-lot-of-value-difficult-to-extract/80431/1

[Crip1]

3 hours ago, Viking said:

@glider3834  GREAT NEWS! Let the speculation begin as to what they are going to do with the proceeds! 
1.) another dutch auction at YE for Fairfax shares

2.) re-invest into insurance/re-insurance subs to grow in hard market

3.) buy out minority partners (Allied)

4.) invest in equities

5.) all of the above (so no big dutch auction, just NCIB for share repurchases

6.) none of the above… what else?

1) This is a great time to reduce share count, but I'm not positive this is the best way to do it.

2) My understanding is the subs have sufficient capital to write their business and then some, so I don't think this is even necessary right now.

3) I like this as well, the return on this in terms of eliminating the interest payments is solid, additional earnings are then gravy.

4) Better now than 8 months ago, but I like other options more.

5) The general mood of the market, the past week notwithstanding, is still negative. They should be able to snap up some shares below UD$500. 

 

-Crip

[SafetyinNumbers]

On 10/26/2022 at 1:10 AM, Parsad said:

 

It seems like many want buybacks, but we're in the midst of a massive correction in the credit markets.  That is usually when Fairfax makes some of their best investments in convertible debt placements.  It would be remiss to prioritize buybacks, if other opportunities present themselves that would potentially be far more rewarding.

 

Fairfax should be looking for the best opportunity out there.  If they can't find any, then they should buy back stock or distribute the capital.  But if markets offer great investments, buybacks would have to take a back seat.  That's just common sense.  Cheers!

Arguably, Fairfax common is the best risk/reward around. They would have to pay at least 1.25x book to buy such a high quality insurance business and arguably a lot more for one that comes with as high a float to book value that Fairfax has at a time when the value of the float is going up as fast as interest rates. There certainly isn’t a business they know better. 
 

Fairfax India might be up there too at less than half of book value (marked to market) but it will probably do its own buyback and increase Fairfax’s stake passively.

[Daphne]

Atlas 

today announced they have entered into a definitive agreement under which Poseidon will acquire Atlas in an all-cash transaction for an enterprise value of approximately $10.9 billion.

Under the terms of the agreement, Poseidon will acquire all outstanding common shares of Atlas not owned by Fairfax, Washington and Mr. Sokol for $15.50 per share in cash. Fairfax, Washington and Mr. Sokol currently own approximately 68% of the outstanding common shares. Atlas will continue payment of all ordinary course quarterly dividends regardless of the timing of any closing. The per share purchase price represents a 34% premium to Atlas’ unaffected share price as of August 4, 2022, the last trading day prior to a publicly disclosed proposal from Poseidon to acquire Atlas.

[valuesource]

41 minutes ago, Daphne said:

Atlas 

today announced they have entered into a definitive agreement under which Poseidon will acquire Atlas in an all-cash transaction for an enterprise value of approximately $10.9 billion.

Under the terms of the agreement, Poseidon will acquire all outstanding common shares of Atlas not owned by Fairfax, Washington and Mr. Sokol for $15.50 per share in cash. Fairfax, Washington and Mr. Sokol currently own approximately 68% of the outstanding common shares. Atlas will continue payment of all ordinary course quarterly dividends regardless of the timing of any closing. The per share purchase price represents a 34% premium to Atlas’ unaffected share price as of August 4, 2022, the last trading day prior to a publicly disclosed proposal from Poseidon to acquire Atlas.

Looks like a weak open on the back of this Atlas acquisition.  Locked at $619.  Perhaps it's too early to tell?

[Daphne]

Atlas 

today announced they have entered into a definitive agreement under which Poseidon will acquire Atlas in an all-cash transaction for an enterprise value of approximately $10.9 billion.

Under the terms of the agreement, Poseidon will acquire all outstanding common shares of Atlas not owned by Fairfax, Washington and Mr. Sokol for $15.50 per share in cash. Fairfax, Washington and Mr. Sokol currently own approximately 68% of the outstanding common shares. Atlas will continue payment of all ordinary course quarterly dividends regardless of the timing of any closing. The per share purchase price represents a 34% premium to Atlas’ unaffected share price as of August 4, 2022, the last trading day prior to a publicly disclosed proposal from Poseidon to acquire Atlas.

[Daphne]

Open looking higher than that…but still down???

[valuesource]

11 minutes ago, valuesource said:

Looks like a weak open on the back of this Atlas acquisition.  Locked at $619.  Perhaps it's too early to tell?

It was too early to tell.  TMX needs a morning batch function.

[Viking]

With the Fairfax Q3 report set to be released after markets close on Thursday here are a few of the things i will be watching. What am i missing?

 

Insurance: 

1.) does top line growth remain close to 20%?

2.) what is Q3 CR? How much over 100? Impact of Hurricane Ian will be a big deal. How big?

3.) hard market expected to run well into 2023? Expectations for hard market for reinsurance?

Bond portfolio

4.) what kind of increase do we see in interest income? What is new run rate for interest and dividend income? (Was $950 million end of Q2.)

5.) what changes, if any, do we see in bond portfolio? Buying and muni’s? 
6.) what is average duration? (1.2 years at June 30)

7.) what is amount of mark to market loss? Another US$400 million?

 

Equity Portfolio 

8.) what is amount of mark to market loss? (My estimate is around $300 million)

9.) any commentary on completed Recipe take private? Funded how?

10.) any commentary on Atlas take private?

 

Other

11.) share of profits of associates? $200 million?

12.) Book value? (Was US$588/share at June 30.)

13.) share buybacks during quarter? (At June 30 there were 23.7 million common shares effectively outstanding.)

14.) increase in debt in Q3 of $750 million. How much of minority interest in Allied is purchased? What is outstanding balance?

15.) capital allocation priority moving forward?

- level of debt is ok (although $750 million just added)

- continue to fund growth at subs in hard market?

- buy back stock?

- continue to buy out minority shareholders in Allied World?

Updates/Commentary:

16.) pet insurance sale closed Oct 31: proceeds to be used for?

17.) Resolute Forest Products sale: to close when? 2023?
18.) Stelco dutch auction: did Fairfax be tender any shares? (Likely not.)

19.) update: regulatory approval to take control of Digit? Status of IPO?

—————
Looking ahead, is Fairfax on glide path to earn $2 billion from underwriting income + interest and dividend income in 2023? 

Edited November 1, 2022 by Viking

[glider3834]

3 hours ago, Viking said:

11.) share of profits of associates? $200 million?

Using as a proxy - just looking at Fairfax's % share of net profit in Atlas, Eurobank, Resolute from Q2 reports - I get a number over $300M (note Eurobank benefited from interest rate hedging gains in Q2) - there are a lot of other private holdings as well, so will have to wait & see what they report.

 

Another question I have is on Stelco, assuming Fairfax did not sell into SIB their ownership is around 23.6% mark - will they equity account their share of net profit on this investment as well or perhaps start in 2023??

Edited November 1, 2022 by glider3834

[Xerxes]

30% return in the past 12 months while market overall did not perform well.

Not bad !

 

I was hoping for a little "deflating" of FFH prices heading into Q3 results, but looks like it is getting a bid instead

[wondering]

I know the regular board members usually ignore the analyst stock recommendations and guidance (with good reason), but I thought it would interesting note National Bank analyst Jaeme Gloyn has FFH at target price at $1,100 Cdn/share, and the average of the analysts is at 919.29

 

as quote in the Globe and Mail

 

“Although one of the best performing Financials stocks year-to-date, FFH remains the best value idea in our coverage,” he said. “Still trading below book value at 0.84 [times, the market is pricing FFH at an ROE of 6 per cent. We believe FFH can deliver sustainable long-run ROE of at least 10 per cent through a combination of consistently strong underwriting growth/profits and improving total investment return performance, in particular as interest rates move higher.”

[Parsad]

38 minutes ago, wondering said:

I know the regular board members usually ignore the analyst stock recommendations and guidance (with good reason), but I thought it would interesting note National Bank analyst Jaeme Gloyn has FFH at target price at $1,100 Cdn/share, and the average of the analysts is at 919.29

 

as quote in the Globe and Mail

 

“Although one of the best performing Financials stocks year-to-date, FFH remains the best value idea in our coverage,” he said. “Still trading below book value at 0.84 [times, the market is pricing FFH at an ROE of 6 per cent. We believe FFH can deliver sustainable long-run ROE of at least 10 per cent through a combination of consistently strong underwriting growth/profits and improving total investment return performance, in particular as interest rates move higher.”

 

$875-900 CDN is where it should be now...in this market.  If they can take advantage of the downturn in bonds and equities, and any acquisition opportunities in the next year or two, it should be at $1,100 CDN within 2 years.  But Mr. Market always is either overly pessimistic or overly optimistic on Fairfax...rarely in the middle.  Cheers!

[Xerxes]

^^^

 

Hopefully it is not going to do a U-turn once it gets above $1,000 (ala Paypal) because FFH management did not lock into longer duration, and when the next monetary easing cycle starts, all the 2-years T-bills will be rolled into lower yields, effectively making this a one-time boost

 

Funny enough almost all the companies seem to have had their "Covid accelerent" in some fashion or another. Some earlier and faster, some later and slower, but always there ....

 

[TwoCitiesCapital]

27 minutes ago, Xerxes said:

^^^

 

Hopefully it is not going to do a U-turn once it gets above $1,000 (ala Paypal) because FFH management did not lock into longer duration, and when the next monetary easing cycle starts, all the 2-years T-bills will be rolled into lower yields, effectively making this a one-time boost

 

Funny enough almost all the companies seem to have had their "Covid accelerent" in some fashion or another. Some earlier and faster, some later and slower, but always there ....

 

 

It won't get to $1,000 w/o locking in the duration IMO. 

 

Fairfax has had one time windfalls and one time pitfalls. The market doesn't know what to expect year-to-year and recent history has been disappointing so that is what is extrapolated forward. 

 

If Fairfax was able to lock in $1+ billion in fixed income coupons for 4-6 years while still maintaining the flexibility to grow that bit by bit each quarter that rates remain elevated...well, that would be showing the market consistency to the earnings power. 

 

As long as they keep rolling 1-2 year treasuries, there's the risk that this is another one-time windfall with no sustainability to the earnings power. 

Edited November 3, 2022 by TwoCitiesCapital

[kab60]

Lancashire seems pretty upbeat FWIW, stock market likes it:

 

Lancashire Holdings Limited (“Lancashire” or “the Group”) today announces its trading statement for the nine  months ended 30 September 2022.

Trading statement key points

• Gross premiums written increased by 34.3% year-on-year to $1.3 billion.

• Group Renewal Price Index (RPI) of 107%.

• Net loss estimates from hurricane Ian in the range of $160-$190 million.

• Total net investment return of negative 5.0%, primarily driven by unrealised losses.

• Strong balance sheet and robust capital position.

Alex Maloney, Group Chief Executive Officer, commented:

“During the quarter we witnessed a number of catastrophe events and we extend our sympathies to the many people impacted. Insurers play a vital role in offering protection to vulnerable communities and we are reminded of both the potential destructive power of nature and the value of the risk solutions we offer. Our current estimate of the net impact of hurricane Ian, excluding inwards and outwards reinstatement premiums and Lancashire Capital Management, is within the range of $160 million to $190 million. This is within our expectations for an event of this type.

During 2022, Lancashire has continued to grow and diversify its underwriting portfolio and deliver on its underwriting strategy. This has been fuelled by solid rate increases and strong market conditions which has given us additional resilience.

Gross premiums written increased by 34.3% year-on-year to $1.3 billion.

We expect the broader positive conditions to continue into 2023 and our strategy is to take advantage of attractive market opportunities. We believe we could see significant increases in rates and improving terms and conditions due to recent events and the fact that capacity had already been tightened in the wider market.

Clearly the macro-economic outlook is increasingly uncertain with significant increases in interest rates, higher inflation, and broader dislocation in global markets and we expect this volatility to continue. Lancashire reported a total net investment return of negative 5%, primarily driven by unrealised losses. Future earnings in our portfolio should be bolstered by the higher interest rate environment, which we should benefit from relatively quickly given the short duration of our portfolio.

We believe we are well-placed to manage inflationary pressures and have competence in dealing with previous inflationary and deflationary changes within a number of our product lines. Inflation will also present further opportunities for us as clients seek to purchase additional cover.

Even allowing for the impact of hurricane Ian, and unrealised investment losses, our capital position remains strong and we will drive forward with our growth strategy and capitalise on the strong rate environment through our diversified product portfolio.

As always, my thanks go to all our colleagues for their hard work and to our brokers, clients and shareholders for their support.”

Edited November 3, 2022 by kab60