Viking Posted July 29, 2022 Share Posted July 29, 2022 My key takeaway after listening to the Q2 conference call: Question: What are plans for proceeds from pet insurance sale? Prem’s answer: buying back stock #1 priority ————— Music to my ears. Link to comment Share on other sites More sharing options...
Thrifty3000 Posted July 29, 2022 Share Posted July 29, 2022 2 hours ago, Viking said: My key takeaway after listening to the Q2 conference call: Question: What are plans for proceeds from pet insurance sale? Prem’s answer: buying back stock #1 priority ————— Music to my ears. Amen! Link to comment Share on other sites More sharing options...
Parsad Posted July 30, 2022 Share Posted July 30, 2022 18 hours ago, Viking said: My key takeaway after listening to the Q2 conference call: Question: What are plans for proceeds from pet insurance sale? Prem’s answer: buying back stock #1 priority ————— Music to my ears. The other thing on the call was that book value losses for most insurers being announced are somewhere between 10% and 30% for 2022 so far...while Fairfax's book loss is around 5%. It would take a $300-400B catastrophe loss to wipe out 10% of book for global insurers. That means depending on bond and equity prices, the insurance hard market may continue for 2-3 years as insurers recoup their book losses and incur further losses as rates rise in the next quarter or so. Cheers! Link to comment Share on other sites More sharing options...
MMM20 Posted July 30, 2022 Share Posted July 30, 2022 (edited) 3 hours ago, Parsad said: The other thing on the call was that book value losses for most insurers being announced are somewhere between 10% and 30% for 2022 so far...while Fairfax's book loss is around 5%. It would take a $300-400B catastrophe loss to wipe out 10% of book for global insurers. That means depending on bond and equity prices, the insurance hard market may continue for 2-3 years as insurers recoup their book losses and incur further losses as rates rise in the next quarter or so. Cheers! Could you explain this view a bit further for the generalists (outsider noobs) among us? Why do investment losses lead to an ongoing hard market? I understand that insurers *want* to raise prices to recoup investment losses - who wouldn’t? - but doesn’t their ability to do so depend purely on supply/demand dynamics on the underwriting side, independent of investment performance? Why wont new entrants with clean balance sheets come in lower than incumbents on pricing? Too theoretical? I think it’s an important question given that the gap to IV has closed a bit over 1.5 years and most other stuff has sold off… FFH is still cheap but maybe less of a relative bargain nowadays. But clearly this depends a lot on the duration of the hard market. Edited July 30, 2022 by MMM20 Link to comment Share on other sites More sharing options...
Thrifty3000 Posted July 30, 2022 Share Posted July 30, 2022 I have some questions about how stock exchanges and Mr Market handle sizable share count changes: The timing and method of updating the number of shares outstanding is an area of stock exchange operations that I don’t fully understand. I assume when the share count is changed that the exchange simply takes the closing market cap and divides it by the new share count for the next day’s opening. (And open bids/asks are automatically adjusted as well.) ^ Question 1) is that how exchanges handle share count changes - closing market cap divided by new share count? For FFH I notice TD Ameritrade is showing a market cap of $14.21 billion and a shares outstanding count of 26.43 million. And a share price of $537. According the the latest quarterly report, as of June 30 the share count was materially lower than 26.43 million at 23,654,827. If you divide the current market cap of $14.21 billion by the new share count we see a share price materially higher than $537 at roughly $600. Question 2) When will the exchanges update the share count to reflect reality? Question 3) Should we expect a significant adjustment upward to the share price to around $600 when the share count is changed? Or is Mr Market already anticipating and pricing in the share count change in a way that we should expect something like a quick sell off and a market cap reduction after the adjustment? Altius recently experienced the reverse of this when it’s share count was significantly increased after Fairfax exercised its options. On the day of the share count adjustment the stock price immediately dropped around 10%. So it appeared Mr Market had not anticipated the share count change. That’s why I’m curious if we can expect a large share price increase for FFH soon when the shares outstanding count is reduced.) Link to comment Share on other sites More sharing options...
glider3834 Posted July 31, 2022 Share Posted July 31, 2022 (edited) 12 hours ago, MMM20 said: I understand that insurers *want* to raise prices to recoup investment losses - who wouldn’t? - but doesn’t their ability to do so depend purely on supply/demand dynamics on the underwriting side, independent of investment performance? The investment environment & insurance cycle are inter-related because regulatory capital ultimately affect what business an insurer is permitted to write. I think hard market has also been affected by - low interest rates (were too low, depressed fixed income returns forced insurers to raise premiums) - higher inflation - social inflation (court judgement award amounts - trending up over time) & economic/financial inflation (impacts reserving/claim costs) - large natural catastrophe losses (elevated in last few years - climate change etc increasing in terms of size and severity - also factor in covid) Edited July 31, 2022 by glider3834 Link to comment Share on other sites More sharing options...
Thrifty3000 Posted July 31, 2022 Share Posted July 31, 2022 23 hours ago, Thrifty3000 said: I have some questions about how stock exchanges and Mr Market handle sizable share count changes: The timing and method of updating the number of shares outstanding is an area of stock exchange operations that I don’t fully understand. I assume when the share count is changed that the exchange simply takes the closing market cap and divides it by the new share count for the next day’s opening. (And open bids/asks are automatically adjusted as well.) ^ Question 1) is that how exchanges handle share count changes - closing market cap divided by new share count? For FFH I notice TD Ameritrade is showing a market cap of $14.21 billion and a shares outstanding count of 26.43 million. And a share price of $537. According the the latest quarterly report, as of June 30 the share count was materially lower than 26.43 million at 23,654,827. If you divide the current market cap of $14.21 billion by the new share count we see a share price materially higher than $537 at roughly $600. Question 2) When will the exchanges update the share count to reflect reality? Question 3) Should we expect a significant adjustment upward to the share price to around $600 when the share count is changed? Or is Mr Market already anticipating and pricing in the share count change in a way that we should expect something like a quick sell off and a market cap reduction after the adjustment? Altius recently experienced the reverse of this when it’s share count was significantly increased after Fairfax exercised its options. On the day of the share count adjustment the stock price immediately dropped around 10%. So it appeared Mr Market had not anticipated the share count change. That’s why I’m curious if we can expect a large share price increase for FFH soon when the shares outstanding count is reduced.) ok, just to continue this riveting conversation with myself I’ve found FINRA Rule 5530, which addresses the rules for adjusting orders in the event of a dividend or stock split. I haven’t been able to find specific guidance on how to handle changes to the number of outstanding shares, but logically exchanges should treat it the same as a stock split, which supports the idea that when the exchanges factor in the new share count we should see a solid bump in Fairfax’s share price. Link to comment Share on other sites More sharing options...
Thrifty3000 Posted July 31, 2022 Share Posted July 31, 2022 18 minutes ago, Thrifty3000 said: ok, just to continue this riveting conversation with myself I’ve found FINRA Rule 5530, which addresses the rules for adjusting orders in the event of a dividend or stock split. I haven’t been able to find specific guidance on how to handle changes to the number of outstanding shares, but logically exchanges should treat it the same as a stock split, which supports the idea that when the exchanges factor in the new share count we should see a solid bump in Fairfax’s share price. Dammit I’m officially irked. Yahoo shows FRFHF’s market cap at $13.57 billion, implying somewhere around 25 million shares outstanding. TD Ameritrade has the market cap at $14.21 billion and 26 million shares outstanding. Fairfax, obviously the official source, tells us there are 23,654,827 shares outstanding. If we multiply 23,654,827 actual shares by the actual share price of $537.87 we get an ACTUAL market cap of $12.7 billion! TD Ameritrade is overstating the value by more than 10%. This means Mr. Market technically believes that one of the best positioned insurers on the planet for this environment, which is earning roughly $2.5 Billion of operating income AND that will have $2 Billion worth of fresh free cash available as dry powder within the next six months (during a Hard Market) is Only worth $12.7 Billion! That’s downright crazy. Link to comment Share on other sites More sharing options...
Viking Posted July 31, 2022 Share Posted July 31, 2022 (edited) Fairfax Financial is an insurance company. However, the volatility of investment results usually overshadow the results of its insurance operations. The size of Fairfax's insurance businesses have increased dramatically. Over the past 8 years net written premiums have increased 228% from $5.98 billion in 2014 to $19.4 billion in 2022 (my estimate) for a compounded growth rate of 16% per year. On a per share basis Fairfax has compounded net premiums written by a little more than 14% per year over the past 8 years (the share count is up about 10%). What has driven this significant growth? For the first 3 years acquisitions drove the growth: Brit (2015), International (2016) and Allied World (2017). For the past 5 years (2018-2022) the growth has been organic driven by the hard market of the past 3 years. Looking back, Fairfax timed their large insurance acquisitions perfectly. 2023 could see net premiums written grow another $3 billion. This would represent 50% growth over what was written in 2014. That is a big deal and possible a game changer for investors. Why do we care what net written premiums are? Because this is a key input in determining underwriting profit. And underwriting profit is one of the critical inputs in determining what an insurance company is worth. Fairfax is on pace to earn an underwriting profit of $1.16 billion in 2022 ($50/share). A new record. My estimate is Fairfax could earn $1.3 billion in 2023 ($58/share). Another record. The previous record was $801 million in 2021 ($31/share). Bottom line, the significant growth in net written premiums the past 8 years is now resulting in Fairfax earning record underwriting profit. And the record underwriting profit party is just getting started. Now we all know financial markets are extremely efficient when pricing equities. Everything that is know about a company is already priced into its equity price. So where was Fairfax stock trading at Dec 31 2014? About US$510. Where is Fairfax stock trading today? US$538. Wow! Really? So was Fairfax way overvalued in 2014? Or is Fairfax way undervalued July 28, 2022? Or is it some combination of the two? Before we reach any final conclusion we need to look at the other engines that power earnings: interest and dividend income and the investment portfolio. We will do this in a future post ---------- Net Prem Earned CR Underwriting Profit 2023 Est $21.7 billion 94 $1.3 billion $58/share 2022 Est $19.4 billion 94 $1.16 billion $50 2021 $15.5 95 $801 million $31 2020 $13.86 97.8 $308 $12 2019 $12.54 96.9 $389 $15 2018 $11.91 97.3 $322 $12 2017 $9.71 106.6 -$642 -$25 2016 $7.86 92.5 $576 $22 2015 $7.37 89.9 $705 $27 2014 $5.98 90.8 $552 $21 ---------- My numbers above do NOT include runoff. My guess is the cost of runoff will come in at about $150 to $200 million per year (about the average from the past couple of years). Edited July 31, 2022 by Viking Link to comment Share on other sites More sharing options...
glider3834 Posted July 31, 2022 Share Posted July 31, 2022 (edited) 1 hour ago, Viking said: Fairfax Financial is an insurance company. However, the volatility of investment results usually overshadow the results of its insurance operations. The size of Fairfax's insurance businesses have increased dramatically. Over the past 8 years net written premiums have increased 228% from $6.1 billion in 2014 to $19.4 billion in 2022 (my estimate) for a compounded growth rate of 16% per year. On a per share basis Fairfax has compounded net premiums written by a little more than 14% per year over the past 8 years (the share count is up about 10%). What has driven this significant growth? For the first 3 years acquisitions drove the growth: Brit (2015), International (2016) and Allied World (2017). For the past 5 years (2018-2022) the growth has been organic driven by the hard market of the past 3 years. Looking back, Fairfax timed their large insurance acquisitions perfectly. 2023 could see net premiums written grow another $3 billion. This would represent 50% growth over what was written in 2014. That is a big deal and possible a game changer for investors. Why do we care what net written premiums are? Because this is a key input in determining underwriting profit. And underwriting profit is one of the critical inputs in determining what an insurance company is worth. Fairfax is on pace to earn an underwriting profit of $1.16 billion in 2022 ($50/share). A new record. My estimate is Fairfax could earn $1.3 billion in 2023 ($58/share). Another record. The previous record was $801 million in 2021 ($31/share). Bottom line, the significant growth in net written premiums the past 8 years is now resulting in Fairfax earning record underwriting profit. And the record underwriting profit party is just getting started. Now we all know financial markets are extremely efficient when pricing equities. Everything that is know about a company is already priced into its equity price. So where was Fairfax stock trading at Dec 31 2014? About US$510. Where is Fairfax stock trading today? US$538. Wow! Really? So was Fairfax way overvalued in 2014? Or is Fairfax way undervalued July 28, 2022? Or is it some combination of the two? Before we reach any final conclusion we need to look at the other engines that power earnings: interest and dividend income and the investment portfolio. We will do this in a future post ---------- Net Prem Earned CR Underwriting Profit 2023 Est $21.7 billion 94 $1.3 billion $58/share 2022 Est $19.4 billion 94 $1.16 billion $50 2021 $15.5 95 $801 million $31 2020 $13.86 97.8 $308 $12 2019 $12.54 96.9 $389 $15 2018 $11.91 97.3 $322 $12 2017 $9.71 106.6 -$642 -$25 2016 $7.86 92.5 $576 $22 2015 $7.37 89.9 $705 $27 2014 $5.98 90.8 $552 $21 ---------- My numbers above do NOT include runoff. My guess is the cost of runoff will come in at about $150 to $200 million per year (about the average from the past couple of years). thanks viking - great summary - its interesting also where they are growing - one key area is specialty/E&S. E&S is harder to do so more specialised, less competitive & more profitable (lower CR) than standard lines. Trisura actually put up a nice summary comparing E&S(specialty market) to standard marketplace & why they are attracted to this space Fairfax has grown to be the #4 E&S (Specialty marketplace) writer in US One of the fastest sub-sector areas in insurance is cyber insurance & with rates hardening here a lot in high double digits, Fairfax has been putting emphasis on growth here - #2 US writer behind Chubb https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/insurers-revisit-cyber-coverage-as-demand-premiums-spike-70880071 #5 US writer in Directors & Officers Liability - again this market was supported by significant rate growth https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/d-o-premiums-grow-38-5-in-2021-loss-ratio-falls-to-multiyear-low-70106981 Edited July 31, 2022 by glider3834 Link to comment Share on other sites More sharing options...
Viking Posted July 31, 2022 Share Posted July 31, 2022 6 minutes ago, glider3834 said: thanks viking - great summary - I also like how they are growing - one key area is specialty/E&S. why? Its harder to do so more specialised, less competitive & more profitable (lower CR) than standard lines. Trisura actually put up a nice summary comparing E&S(specialty market) to standard marketplace & why they are attracted to this space Fairfax has grown to be the #4 E&S (Specialty marketplace) writer in US One of the fastest sub-sector areas in insurance is cyber insurance & with rates hardening here a lot in high double digits, Fairfax has been putting emphasis on growth here - #2 US writer behind Chubb https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/insurers-revisit-cyber-coverage-as-demand-premiums-spike-70880071 #5 US writer in Directors & Officers Liability - again this market was supported by significant rate growth https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/d-o-premiums-grow-38-5-in-2021-loss-ratio-falls-to-multiyear-low-70106981 Glider, thanks for the insight. Lots to like about what Fairfax is building… Link to comment Share on other sites More sharing options...
Viking Posted August 1, 2022 Share Posted August 1, 2022 (edited) 2 hours ago, Viking said: Fairfax Financial is an insurance company. However, the volatility of investment results usually overshadow the results of its insurance operations. The size of Fairfax's insurance businesses have increased dramatically. Over the past 8 years net written premiums have increased 228% from $5.98 billion in 2014 to $19.4 billion in 2022 (my estimate) for a compounded growth rate of 16% per year. On a per share basis Fairfax has compounded net premiums written by a little more than 14% per year over the past 8 years (the share count is up about 10%). What has driven this significant growth? For the first 3 years acquisitions drove the growth: Brit (2015), International (2016) and Allied World (2017). For the past 5 years (2018-2022) the growth has been organic driven by the hard market of the past 3 years. Looking back, Fairfax timed their large insurance acquisitions perfectly. 2023 could see net premiums written grow another $3 billion. This would represent 50% growth over what was written in 2014. That is a big deal and possible a game changer for investors. Why do we care what net written premiums are? Because this is a key input in determining underwriting profit. And underwriting profit is one of the critical inputs in determining what an insurance company is worth. Fairfax is on pace to earn an underwriting profit of $1.16 billion in 2022 ($50/share). A new record. My estimate is Fairfax could earn $1.3 billion in 2023 ($58/share). Another record. The previous record was $801 million in 2021 ($31/share). Bottom line, the significant growth in net written premiums the past 8 years is now resulting in Fairfax earning record underwriting profit. And the record underwriting profit party is just getting started. Now we all know financial markets are extremely efficient when pricing equities. Everything that is know about a company is already priced into its equity price. So where was Fairfax stock trading at Dec 31 2014? About US$510. Where is Fairfax stock trading today? US$538. Wow! Really? So was Fairfax way overvalued in 2014? Or is Fairfax way undervalued July 28, 2022? Or is it some combination of the two? Before we reach any final conclusion we need to look at the other engines that power earnings: interest and dividend income and the investment portfolio. We will do this in a future post ---------- Net Prem Earned CR Underwriting Profit 2023 Est $21.7 billion 94 $1.3 billion $58/share 2022 Est $19.4 billion 94 $1.16 billion $50 2021 $15.5 95 $801 million $31 2020 $13.86 97.8 $308 $12 2019 $12.54 96.9 $389 $15 2018 $11.91 97.3 $322 $12 2017 $9.71 106.6 -$642 -$25 2016 $7.86 92.5 $576 $22 2015 $7.37 89.9 $705 $27 2014 $5.98 90.8 $552 $21 ---------- My numbers above do NOT include runoff. My guess is the cost of runoff will come in at about $150 to $200 million per year (about the average from the past couple of years). With spiking bond yields in 2022, interest and dividend income at Fairfax has been increasing rapidly. With Q2 results Fairfax provided a forecast for interest and dividend income of about $950 million annually (current normalized run rate). This compares to a run rate of $530 million annually at the end of 2021. This is about an 80% increase in 7 short months. By combining my last 2 posts we can now estimate Fairfax’s operating income = underwriting income + interest and dividend income. UI. I&DI 2022 est. $1.16 + $0.84 = $2 billion / 23.7 mill shares = $84/share 2023 est. $1.3. + $1.0 = $2.3 billion / 22.7 mill shares = $101/share Operating income is now large enough at Fairfax that it will serve as an important offset to the volatility of the company's deep value equity holdings - which can be very volatile from year to year (as we have just seen with results reported in Q2). Significant operating income will provide an important 'shock absorber' to reported Fairfax results and book value moving forward. ————- The above does not include underwriting losses from runoff. It also does not include share of profit of associates (Eurobank, Altas and Resolute) which was $188 million in Q2 and $316 million in 1H. ————— Fairfax’s bond portfolio had an average duration of 1.2 years at June 30, 2022. Fairfax has been a significant beneficiary of rising interest rates. Given the comments from Prem on the Q2 call, Fairfax continues to believe interest rates are likely to increase over the next year. The average duration of Fairfax’s bond portfolio will be something to monitor in the coming quarters. ————— In my estimates for 2023 i think Fairfax’s share count will be at least 1 million lower (falling from 23.7 to 22.7). And i think there is a good chance the share count falls 2 million in 2023 to 21.7 million. How? After the pet insurance sale closes, and if we see a normal Q3 hurricane season, i think Fairfax will do another $1 to $1.2 billion buyback in Q4 perhaps with a price to US$600. Edited August 1, 2022 by Viking Link to comment Share on other sites More sharing options...
glider3834 Posted August 1, 2022 Share Posted August 1, 2022 57 minutes ago, Viking said: Glider, thanks for the insight. Lots to like about what Fairfax is building… Link to comment Share on other sites More sharing options...
glider3834 Posted August 1, 2022 Share Posted August 1, 2022 (edited) Just looking at 2Q & 1H'22 results & I don't want to speak too soon with business end of the year (ie hurricane season) upon us - but Brit results continue to improve with decent premium growth & better combined ratios Brit managed rate increases close to 12% in 1H driving premium growth Brit's (20% owned) Insurtech Ki continues to scale quickly with significant premium growth (Ki wrote close to 400 mil for 2021 calendar year) & its combined ratio has improved close to break even in 2Q & 1H'22. Edited August 1, 2022 by glider3834 Link to comment Share on other sites More sharing options...
Thrifty3000 Posted August 1, 2022 Share Posted August 1, 2022 15 hours ago, Viking said: With spiking bond yields in 2022, interest and dividend income at Fairfax has been increasing rapidly. With Q2 results Fairfax provided a forecast for interest and dividend income of about $950 million annually (current normalized run rate). This compares to a run rate of $530 million annually at the end of 2021. This is about an 80% increase in 7 short months. By combining my last 2 posts we can now estimate Fairfax’s operating income = underwriting income + interest and dividend income. UI. I&DI 2022 est. $1.16 + $0.84 = $2 billion / 23.7 mill shares = $84/share 2023 est. $1.3. + $1.0 = $2.3 billion / 22.7 mill shares = $101/share Operating income is now large enough at Fairfax that it will serve as an important offset to the volatility of the company's deep value equity holdings - which can be very volatile from year to year (as we have just seen with results reported in Q2). Significant operating income will provide an important 'shock absorber' to reported Fairfax results and book value moving forward. ————- The above does not include underwriting losses from runoff. It also does not include share of profit of associates (Eurobank, Altas and Resolute) which was $188 million in Q2 and $316 million in 1H. ————— Fairfax’s bond portfolio had an average duration of 1.2 years at June 30, 2022. Fairfax has been a significant beneficiary of rising interest rates. Given the comments from Prem on the Q2 call, Fairfax continues to believe interest rates are likely to increase over the next year. The average duration of Fairfax’s bond portfolio will be something to monitor in the coming quarters. ————— In my estimates for 2023 i think Fairfax’s share count will be at least 1 million lower (falling from 23.7 to 22.7). And i think there is a good chance the share count falls 2 million in 2023 to 21.7 million. How? After the pet insurance sale closes, and if we see a normal Q3 hurricane season, i think Fairfax will do another $1 to $1.2 billion buyback in Q4 perhaps with a price to US$600. @Viking as always, THANKS for the fantastic analysis. One thing you may want to add into the spreadsheet is an assumption that the diluted share count will continue increasing by 200,000 to 250,000 shares annually (until prevailing trends change). 15%+ yoy growth of diluted share count is a bit disappointing, and certainly offsets a sizable portion of the benefits of the buybacks. Diluted shares: 2016: 0 2017: 689,571 +689,571 2018: 890,985 +201,414 2019: 1,159,352 +268,367 2020: 1,273,250 +113,898 2021: 1,503,931 +230,681 Link to comment Share on other sites More sharing options...
Viking Posted August 1, 2022 Share Posted August 1, 2022 32 minutes ago, Thrifty3000 said: @Viking as always, THANKS for the fantastic analysis. One thing you may want to add into the spreadsheet is an assumption that the diluted share count will continue increasing by 200,000 to 250,000 shares annually (until prevailing trends change). 15%+ yoy growth of diluted share count is a bit disappointing, and certainly offsets a sizable portion of the benefits of the buybacks. Diluted shares: 2016: 0 2017: 689,571 +689,571 2018: 890,985 +201,414 2019: 1,159,352 +268,367 2020: 1,273,250 +113,898 2021: 1,503,931 +230,681 @Thrifty3000 thanks for providing details on diluted shares. I do need to better understand this bucket. My assumption is these shares are part of employee compensation program. Do you know the details? Are they earned over many years? Are they performance based at all? Link to comment Share on other sites More sharing options...
Thrifty3000 Posted August 1, 2022 Share Posted August 1, 2022 (edited) 22 minutes ago, Viking said: @Thrifty3000 thanks for providing details on diluted shares. I do need to better understand this bucket. My assumption is these shares are part of employee compensation program. Do you know the details? Are they earned over many years? Are they performance based at all? They're for employee comp plans. I believe when they first appeared Prem said they were mostly for managers and would be earned over a long period of time. I'm assuming the vesting schedule extends beyond the more traditional 4 or 5 years, but I don't know the specific terms. Maybe 10% will vest annually, I don't know. Edited August 1, 2022 by Thrifty3000 Link to comment Share on other sites More sharing options...
A_Hamilton Posted August 1, 2022 Share Posted August 1, 2022 On 7/30/2022 at 3:59 AM, Parsad said: The other thing on the call was that book value losses for most insurers being announced are somewhere between 10% and 30% for 2022 so far...while Fairfax's book loss is around 5%. It would take a $300-400B catastrophe loss to wipe out 10% of book for global insurers. That means depending on bond and equity prices, the insurance hard market may continue for 2-3 years as insurers recoup their book losses and incur further losses as rates rise in the next quarter or so. Cheers! I guess I disagree re: FFH's book loss. One has to include the deficiency in fair value from non-insurance associates. It is part of the investment book and real. FFH would be down ~12% with this included. Nonetheless, I don't think it matters all that much given the growth rates here and strong combined ratios... Link to comment Share on other sites More sharing options...
Viking Posted August 1, 2022 Share Posted August 1, 2022 (edited) With the release of Q2 results we got additional information on the pet insurance sale to JAB. This has to be one of the best investments Fairfax has ever made. The after tax gain is $975 million ($41/share) and will be booked when the sales closes later this year. For a business with $350 million of revenue (if i understood the Q2 conference call correctly). Fairfax made two purchases in 2013 and 2014. The pet insurance business was cultivated within Fairfax for 10 years. The pandemic likely accelerated the growth of the business. And now Fairfax is opportunistically exiting/selling at what looks to be a very good price. And selling this business looks like it will have little impact on Fairfax’s future insurance business (top or bottom line). We like to obsess over Fairfax’s many investment failures over the years. Farmers Edge being the most recent example. The flip side of the coin is Fairfax has many examples of where they have hit the ball out of the park. Most importantly, the gain from the sale of the pet insurance business will not be used to cover significant realized losses in the investment portfolio (like the recent $4.5 billion in losses from the disastrous shorting campaign that stretched over 7 years). Instead, the significant gains will be used to build future shareholder value. This is a significant NEW development for Fairfax. And that prospect should get all Fairfax shareholders very excited. Fairfax is now, after 7 lean years, finally playing offence again. Strong underwriting + solid investment gains are now driving significant growth in BV per share. 2021 was the start. Much more is coming. Eventually investors will figure it out. The trifecta is happening with Fairfax: 1.) growing earnings 2.) higher multiple 3.) lower share count ————— Fairfax will receive approximately $1.4 billion in the form of approximately $1.15 billion in cash and $250 million in seller promissory notes, and the company will also invest $200 million in JCP V, a JAB consumer fund. The transaction is expected to close in the second half of 2022. On closing of the transaction the company expects to record an after-tax gain of approximately $975, and deconsolidate assets and liabilities with carrying values at June 30, 2022 of approximately $150 and $32. ————— Mark Dwelle RBC - Another quick numbers question. If I may, on the sale of the Pet Insurance business. Can you give us a sense of kind of a range of about how much revenue you'll be, I guess, selling when that happens? And again, it's just I'm trying to understand as we get into next year, that's revenue that will go away from Crum and to be able to keep track of the run rate there. Prem Watsa: Sure, Tom. But forex must be $350 million, and it's a Pet Insurance and it's in the United States, mainly, but Canada and then the UK, some, and obviously, we like the price. But JAB is they get a lot of good things from Crum, including data on 30 million pets, and ASPCA support for 16 years. And so we think it's a win-win. ————— TORONTO, ONTARIO--(Marketwired - May 15, 2013) - Fairfax Financial Holdings Limited (TSX:FFH)(TSX:FFH.U) announces the signing of a merger agreement with Hartville Group, Inc., of Canton, Ohio, pursuant to which Hartville will become wholly-owned by Crum & Forster's United States Fire Insurance Company. The transaction, which is subject to customary conditions including regulatory approval, is expected to close early in the third quarter of 2013. Hartville, one of the oldest and largest pet insurance providers in the U.S., provides pet insurance plans under several brand names, including Hartville Pet Insurance and the Petshealth Care Plan. Hartville also is the exclusive strategic partner for pet insurance with The American Society for the Prevention of Cruelty to Animals®. "We are very excited to have Hartville join the Fairfax group," said Prem Watsa, Chairman and CEO of Fairfax. "This acquisition represents a new phase in our existing relationship with Hartville through Fairmont Specialty. As a result of the vertical integration created by this merger, Hartville's pet insurance programs will be uniquely positioned in the industry to generate sustainable growth." ————— TORONTO and OAKVILLE, ONTARIO, August 29, 2014 – Fairfax Financial Holdings Limited (TSX: FFH)(TSX: FFH.U) (“Fairfax”) and Pethealth Inc. (TSX: PTZ) (“Pethealth”) announced today that they have entered into an arrangement agreement (the “Arrangement Agreement”) under which Fairfax will acquire all of the outstanding common shares of Pethealth for $2.79 per share in cash. In addition, under the terms of the transaction, Fairfax will acquire all of the outstanding preferred shares of Pethealth for a purchase price of $2.79 per share in cash, plus any dividends accrued but unpaid up to, but excluding, the day of closing. The purchase price represents a premium of approximately 26% to the closing price of Pethealth’s common shares on the TSX on August 29, 2014 and a premium of approximately 69% to the closing price of Pethealth’s common shares on the TSX on August 15, 2014 (Pethealth announced on August 19, 2014 that it was reviewing strategic alternatives). The purchase price also represents a premium of approximately 69% to Pethealth’s volume weighted average share price for the twenty trading days ending on August 15, 2014 and a premium of 36% to the all-time high price of Pethealth’s common shares prior to such date. Total cash consideration of approximately $100 million will be paid for Pethealth’s common and preferred shares and options. The transaction, which will be completed by way of a plan of arrangement (the “Arrangement”), is subject to certain customary closing conditions, and is expected to close in the fourth quarter of 2014. Edited August 1, 2022 by Viking Link to comment Share on other sites More sharing options...
Parsad Posted August 2, 2022 Share Posted August 2, 2022 On 7/30/2022 at 5:34 AM, MMM20 said: Could you explain this view a bit further for the generalists (outsider noobs) among us? Why do investment losses lead to an ongoing hard market? I understand that insurers *want* to raise prices to recoup investment losses - who wouldn’t? - but doesn’t their ability to do so depend purely on supply/demand dynamics on the underwriting side, independent of investment performance? Why wont new entrants with clean balance sheets come in lower than incumbents on pricing? Too theoretical? I think it’s an important question given that the gap to IV has closed a bit over 1.5 years and most other stuff has sold off… FFH is still cheap but maybe less of a relative bargain nowadays. But clearly this depends a lot on the duration of the hard market. New entrants will come in, but remember that equity and bond losses extend to outside institutions (hedge funds, private equity, pension plans, etc) as well. In an inflationary environment, the replacement cost of losses has probably escalated dramatically...I can tell you for a fact that every type of insurance I buy (other than life insurance) has increased the replacement cost and increased premiums. So while you will have new entrants come in, it will be offset by the magnitude of losses in statutory surplus and the sheer demand for insurance. The other factor is if you are an insurer with lower losses so far like Fairfax. They've made sure that statutory surplus levels are more than adequate for their insurance subs to write as much business as they can, while maintaining the size of their portfolio and liquidity levels so that they can take advantage of opportunities compared to other insurers. That's if Fairfax does take advantage of the opportunity...often they've been TOO patient when the table turns and should have invested more. Combining both...lower losses and greater opportunities...means that buying Fairfax at 0.8-0.9 times book may make more sense long-term than buying other insurers at 1.2 times book or higher. Cheers! From the 2nd Q transcript: The next question is coming from Jaeme Gloyn, National Bank Financial. Jaeme Gloyn Yes, good morning. My question is focused on the top line growth, gross premiums written obviously, really rapid growth, the last three quarters, I guess, a modest deceleration, but still at north of 20%, in in Q2 ‘22, year-over-year, gross premiums rightly grow. Just want to get your views on where you expect to see that top line number trending over the next couple of quarters? Should we continue to see north of 20% premiums growth? Or is there some dynamics in the market, whether it's a deceleration of that of hard markets, in some lines, that might keep or push that growth rate down below 20s but still in the teens. Prem Watsa So Jaeme, the next quarter, two quarters or three quarters, we never, you never can tell what the growth is going to be. But there's a lot of momentum for these growth rates that you've seen to continue. We don't believe in forecasting these things, we just look at what has happened. But there is a lot of momentum for it to continue. Hard market is not going to continue forever it'll stop some time. But the big thing that you should focus on as an analyst, all of you analysts, look at the impact of interest rates going up, like shareholders equity for a whole ton of companies reporting, record earnings, operating income, like us, book value down 5%. Now our book value, at least on the fixed income side, it doesn't last long, between six months and 18 months, as Jen was saying it disappears. Meaning it's redeemed and we put the money back into higher yielding income and that's why treasury bonds and other bonds. And that's why our rates going up. But if many of the US companies have got 10% and maybe 15% decrease in book value, shareholders’ equity per share, and in a way and in Europe where interest rates went to zero and negative, and they are now moving up. And that's still very marginal at best at 10 year rates at 1%. And third year rates at 1.5%, 2% increase in those rates will have a significant impact. And like I said 30% drop in shareholders equity for some early reporting companies. And so you have to watch that and a lot of the European companies report only on the second half. So meaning they report only on a half not a quarter by quarter basis. And so this -- what we might be seeing is the hard market continuing, you can tell, but you have to watch this and the hard market might continue what Peter, you want to add on to that? Peter Clarke I think the only thing I'd add is we're still getting rate and we're still getting fairly good rates, like 7.5%. So that's going to drive growth alone. And then different lines of business are increasing still DNO, VNO for example, in the US has stabilized. But property CAT, a lot of raise, a lot of capacity there. And a lot of opportunity. So we're seeing a little bit more on the reinsurance side, less on the insurance side, but I think we'll see -- we'll still see strong growth in the next six months. Jaeme Gloyn Yes, and I guess I take it that you are more resilient, equity based balance sheet book value, allows you to be more competitive in this hard market than some of your global peers. Prem Watsa That’s it. That's exactly right, Jaeme. 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glider3834 Posted August 2, 2022 Share Posted August 2, 2022 (edited) 13 hours ago, Thrifty3000 said: @Viking as always, THANKS for the fantastic analysis. One thing you may want to add into the spreadsheet is an assumption that the diluted share count will continue increasing by 200,000 to 250,000 shares annually (until prevailing trends change). 15%+ yoy growth of diluted share count is a bit disappointing, and certainly offsets a sizable portion of the benefits of the buybacks. Diluted shares: 2016: 0 2017: 689,571 +689,571 2018: 890,985 +201,414 2019: 1,159,352 +268,367 2020: 1,273,250 +113,898 2021: 1,503,931 +230,681 actually these restricted share-based payment awards (RSAs) were 567K at end of 2016, so increase for 2017 was 122k not 689k. Thinking holistically about the business, Fairfax needs to incentivise & retain management/staff & RSAs also help align management & shareholder interests over the long term. The financial results are really the litmus test on whether these types of remuneration arrangements are effective - so you have to evaluate against the financial performance (insurance & investment results) of the business over the last few years & ask the question has it been a win/win for Fairfax? Worth considering that these share based awards have long vesting periods of up to 15 years (in other companies it may typically be closer to 3-5 years) & these Fairfax awards are also subject to performance hurdles eg underwriting profit - here is one for Allied World https://www.sec.gov/Archives/edgar/data/915191/000094787122000815/ss1199327_ex9901.htm The amortisation of share-based compensation for Fairfax was 104 mil pre-tax in 2021. To offset the dilution on these share awards Fairfax has been repurchasing shares on an ongoing basis including in 2021 - this is a cash cost to Fairfax . Looking at the share-based comp expense in 2021, I estimate it might have reduced BVPS growth by approx $4-$4.50 or bit under 1% in 2021. Edited August 2, 2022 by glider3834 Link to comment Share on other sites More sharing options...
Thrifty3000 Posted August 5, 2022 Share Posted August 5, 2022 FYI - Vanguard no longer permits buying FRFHF, because it’s OTC. Link to comment Share on other sites More sharing options...
Xerxes Posted August 5, 2022 Share Posted August 5, 2022 Stelco is slightly up above its bid issue of $35. Trading now at $36.81. is that the market connecting Atlas-FFH-Stelco !! Link to comment Share on other sites More sharing options...
backtothebeach Posted August 5, 2022 Share Posted August 5, 2022 (edited) 50 minutes ago, Xerxes said: Stelco is slightly up above its bid issue of $35. Trading now at $36.81. is that the market connecting Atlas-FFH-Stelco !! You mean the market thinks Fairfax will tender the Stelco shares to finance the Atlas takeout, which is positive for Stelco, that's why its price is up? What I don't understand is why anyone that is willing to tender at $35 would not sell as much as they can at market prices above $35, thus keeping the price close to $35. Is it not worth their time because volume is low and a few $100.000 more or less is just a rounding error to them? I'd happily take that job... Admittedly I don't know much about moving huge blocks of shares. Edited August 5, 2022 by backtothebeach Link to comment Share on other sites More sharing options...
Xerxes Posted August 5, 2022 Share Posted August 5, 2022 No, I mean FFH won’t tender for Stelco. but at a certain point (not immediately), once Stelco vacuumed up what they could through the tender off, there would be privatization bid from a consortium including the CEO, his private equity and Fairfax. Link to comment Share on other sites More sharing options...
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