Fairfax 2022

[newtovalue]

One issue I have with looking at book value for Fairfax is the large goodwill they have ($6 billion usd) vs an equity book value of $16 billion. I still think Fairfax is cheap - but hard to find the comparison to make to Y or Brk as they don’t have such large goodwill balances.

 

 

[MMM20]

43 minutes ago, newtovalue said:

One issue I have with looking at book value for Fairfax is the large goodwill they have ($6 billion usd) vs an equity book value of $16 billion. I still think Fairfax is cheap - but hard to find the comparison to make to Y or Brk as they don’t have such large goodwill balances.

 

 

This is why it’s crucial to have an economic model vs an accounting model. That distinction is key IMHO and what the market misses. The earnings power is obfuscated by the crazy accounting treatment of these companies which Buffett has written about at length. Prem doesn’t do himself any favors with the way he lays it out in the reports but it’s getting better at least. 

Edited April 2, 2022 by MMM20

[glider3834]

2 hours ago, newtovalue said:

One issue I have with looking at book value for Fairfax is the large goodwill they have ($6 billion usd) vs an equity book value of $16 billion. I still think Fairfax is cheap - but hard to find the comparison to make to Y or Brk as they don’t have such large goodwill balances.

 

 

Newtovalue you have to factor

1. If Fairfax controls sub it consolidates goodwill eg Recipe - if Fairfax only owned a non-controlling stake eg 5% - it would record as equity security at market value ie a tangible asset with no goodwill.

 

2. You have to separate goodwill belonging to common shareholders from goodwill belonging to non-controlling interests - see annual report.

 

3. Fairfax in last qtr reported excess of market (fair value) of non-insurance subs over their carrying value(include goodwill) - I think this one useful measure in testing whether goodwill is appropriate.

 

Although doing discounted cash flow analysis would be key way to check.

 

 

 

 

Edited April 2, 2022 by glider3834

[newtovalue]

Thanks for the comments glider!

 

good point on not including goodwill owned by non controlling shareholders- never considered that.

 

Ty!

[glider3834]

10 hours ago, newtovalue said:

Thanks for the comments glider!

 

good point on not including goodwill owned by non controlling shareholders- never considered that.

 

Ty!

no worries - I think NCIs are a smaller percentage of equity at Alleghany & Berkshire compared to Fairfax

[glider3834]

Question - Will Fairfax will release preliminary Q1 numbers on 14 April like previous years ? 

[StubbleJumper]

50 minutes ago, glider3834 said:

Question - Will Fairfax will release preliminary Q1 numbers on 14 April like previous years ? 

 

They started doing that after the market went wacky two years ago during the initial COVID panic.  It was helpful at the time because we knew that they were getting hammered by Mark to market losses, some of the subs (recipe among others) were basically shut down, significant COVID insurance claims were rumoured and access to credit markets was dubious. 

 

A mid quarter release provided shareholders with the necessary clarity that they had little exposure to BI claims in North America, they had addressed liquidity by completely drawing the revolver before the bank could invent a reason to pull it, and to quantify the equity market shit-show.  I have no idea why they made a similar release last year, or why they would do so this year.  Just release the quarterly results when they are ready unless there's a compelling need to provide urgent disclosure to shareholders.

 

 

SJ

[newtovalue]

Hey guys - so I try to value FFH using the two column approach like Buffet suggests for BRK - and I get a really high number - so please tell me where I'm going wrong. General approach is as follows

 

FFH Value =  Net Investments Per share + 10x Insurance Earnings

 

Shares Outstanding = 23,772,881

 

Assets

- Listed Common Stocks     $8.2BB (ATCO $1.8BB, EUROBANK $1.45BB, FIH/U $735MM etc...)
- Digit                                    $1.6BB
- Cash                                    $23.28BB
- Bonds                                  $14.09BB
- Pref Stock                           $2.4BB

Total Assets                           $39.7BB

 

Liabilities

- Borrowing                            $7.95BB

- Pref Stock                            $2.41BB
- Minority Interest                  $4.93BB

Total Liabilities                        $4.93B

 

Net Investments Per share = $1500 USD 

 

Insurance Earnings ~$250MM per yer (conservatively) --> 10x multiple = $2.5BB USD = $105 per share

 

Total Value = $1500 + 105 = $1605 USD = ~$2000CAD

 

Whats not included:

- dont subtract out float

- dont give any value to non-insurance subs that are not publicly listed (like CCM, others).

 

Please tell me what I'm missing. Or if this model is correct - I should just load up on FFH here?

 

ty! 

 

[petec]

14 hours ago, newtovalue said:

Hey guys - so I try to value FFH using the two column approach like Buffet suggests for BRK - and I get a really high number - so please tell me where I'm going wrong. General approach is as follows

 

FFH Value =  Net Investments Per share + 10x Insurance Earnings

 

Shares Outstanding = 23,772,881

 

Assets

- Listed Common Stocks     $8.2BB (ATCO $1.8BB, EUROBANK $1.45BB, FIH/U $735MM etc...)
- Digit                                    $1.6BB
- Cash                                    $23.28BB
- Bonds                                  $14.09BB
- Pref Stock                           $2.4BB

Total Assets                           $39.7BB

 

Liabilities

- Borrowing                            $7.95BB

- Pref Stock                            $2.41BB
- Minority Interest                  $4.93BB

Total Liabilities                        $4.93B

 

Net Investments Per share = $1500 USD 

 

Insurance Earnings ~$250MM per yer (conservatively) --> 10x multiple = $2.5BB USD = $105 per share

 

Total Value = $1500 + 105 = $1605 USD = ~$2000CAD

 

Whats not included:

- dont subtract out float

- dont give any value to non-insurance subs that are not publicly listed (like CCM, others).

 

Please tell me what I'm missing. Or if this model is correct - I should just load up on FFH here?

 

ty! 

 

I thought the two-column approach was float per share plus *non* insurance earnings?

[glider3834]

16 hours ago, newtovalue said:

Hey guys - so I try to value FFH using the two column approach like Buffet suggests for BRK - and I get a really high number - so please tell me where I'm going wrong. General approach is as follows

 

FFH Value =  Net Investments Per share + 10x Insurance Earnings

 

Shares Outstanding = 23,772,881

 

Assets

- Listed Common Stocks     $8.2BB (ATCO $1.8BB, EUROBANK $1.45BB, FIH/U $735MM etc...)
- Digit                                    $1.6BB
- Cash                                    $23.28BB
- Bonds                                  $14.09BB
- Pref Stock                           $2.4BB

Total Assets                           $39.7BB

 

Liabilities

- Borrowing                            $7.95BB

- Pref Stock                            $2.41BB
- Minority Interest                  $4.93BB

Total Liabilities                        $4.93B

 

Net Investments Per share = $1500 USD 

 

Insurance Earnings ~$250MM per yer (conservatively) --> 10x multiple = $2.5BB USD = $105 per share

 

Total Value = $1500 + 105 = $1605 USD = ~$2000CAD

 

Whats not included:

- dont subtract out float

- dont give any value to non-insurance subs that are not publicly listed (like CCM, others).

 

Please tell me what I'm missing. Or if this model is correct - I should just load up on FFH here?

 

ty! 

 

I would try & work out what % rate can they compound book value at & then decide what P/BV you think its worth.

 

I would check out their annual reports, Fairfax derives income from

 

1. underwriting income (ie (1- combined ratio estimate ) x forecast net earned premium) plus

2. investment returns ( interest & dividends, profit from associates, realised & unrealised gains) ie estimate return % x total portfolio investments

 

Then you can subtract estimates for expenses, taxes etc to get net income (common shareholders) & then forecast ROE (ie estimate growth % rate in BVPS)

 

Over 2017-2021 Fairfax CAGR in BVPS I believe was around 13% 

 

If Fairfax can maintain over time a CAGR % growth rate for BVPS  in 12-13% area , then I would think it should trade at a premium to BVPS, if my required return rate is around 10% p.a. 

 

 

 

 

 

 

 

 

Edited April 5, 2022 by glider3834

[newtovalue]

11 hours ago, petec said:

I thought the two-column approach was float per share plus *non* insurance earnings?

Thanks petec - you are correct.

 

if we assume 0 for non operating earnings - we get net investments per share of $1500 usd - stock is still wildly undervalued.

 

ty!

[Viking]

P&C insurers have been big stock market out-performers YTD 2022. Why? My guess:

1.) viewed as being big beneficiaries of higher interest rates. 
2.) continuing hard market for pricing is perhaps also a factor

 

I am starting to wonder IF interest rates will not move much higher over the next year than Mr Market currently expect. Could we see short term rates over 3.5%? And 10 year rates over 4.5% by the end of 2022?
 

If rates continue to move higher Fairfax stands to be a big, big winner. And that is because the average duration of its bond portfolio is 1.2 years, well below all other p&c insurers making Fairfax both an absolute and relative winner). We will see interest and dividend income increase each quarter moving forward. And the increases should pick up steam with each passing quarter. A target of $1 billion in interest dividend income in 2023 is looking more and more like a CERTAINTY. This would be about a 50% increase over 2021. Material. 

 

If Fairfax does nothing to duration they will still see a spike in interest and dividend income, especially in Q2 if we get a couple of 50 basis point increases in short term rates from the Fed. 
 

But it is likely (i think) that Fairfax will be given an opportunity to increase duration at some point over the next 6 months. I think there is a good chance we also could see credit spreads increase. Much higher US treasury rates + an increase in credit spreads = wonderful opportunity for Fairfax and its bond portfolio and its interest and dividend bucket. 
 

One big benefit for shareholders of Fairfax increasing duration (at the right time) is it would provide better visibility/sustainability into the future of the level of the interest & dividend bucket. Which would then likely support multiple expansion.
—————

It will also be super interesting to see if we are still in a hard market for insurance pricing. Was Fairfax able to grow net written premiums at 20% in Q1? If so, this means float will continue to grow rapidly. And with bond yields spiking… more good news.

Edited April 7, 2022 by Viking

[glider3834]

re new Canadian tax rules - looks like they have scaled back the original plans & limited to banks & life insurers - so I would guess that would exclude P&C insurers like Fairfax, but has anyone had a closer look in terms of potential impact for Fairfax?

 

'Within the insurance sector, there was some relief Thursday because the government clarified that only life insurers would be affected – which means property and casualty insurers won’t be hit.

https://www.theglobeandmail.com/business/article-federal-budget-2022-bank-life-insurer-tax/

[glider3834]

2 hours ago, Viking said:

P&C insurers have been big stock market out-performers YTD 2022. Why? My guess:

1.) viewed as being big beneficiaries of higher interest rates. 
2.) continuing hard market for pricing is perhaps also a factor

yes viking i would agree 

[nwoodman]

2 hours ago, glider3834 said:

re new Canadian tax rules - looks like they have scaled back the original plans & limited to banks & life insurers - so I would guess that would exclude P&C insurers like Fairfax, but has anyone had a closer look in terms of potential impact for Fairfax?

 

'Within the insurance sector, there was some relief Thursday because the government clarified that only life insurers would be affected – which means property and casualty insurers won’t be hit.

https://www.theglobeandmail.com/business/article-federal-budget-2022-bank-life-insurer-tax/

Excellent news.  Thanks for the link

[glider3834]

thank you Brian Bradstreet & Co

 

[glider3834]

2 hours ago, nwoodman said:

Excellent news.  Thanks for the link

no worries nwoodman - yes that was a potential question mark item, we can now strikethrough I think

Edited April 8, 2022 by glider3834

[Parsad]

2 hours ago, glider3834 said:

thank you Brian Bradstreet & Co

 

 

Brian in my opinion is one of the best bond managers in history in terms of performance and being able to see big events in the bond landscape.  I'm sure he's doing his best to teach the younger managers, but it is actually impossible to replace him.  Cheers!

[Parsad]

Just now, Parsad said:

 

Brian in my opinion is one of the best bond managers in history in terms of performance and being able to see big events in the bond landscape.  I'm sure he's doing his best to teach the younger managers, but it is actually impossible to replace him.  Cheers!

 

The one other guy that I would say in the Fairfax sphere that has some understanding of bonds similar to Brian is actually Francis Chou believe it or not.  Cheers!

[Viking]

Well Travelers got Q2 earnings for insurance companies going before markets opened today. How did they do? Shares sold off 5%. So not great (according to Mr Market). Why? Not sure, but here are a few possibilities:

1.) hard market looking long in the tooth 

2.) at the same time rising inflation looks to be an emerging issue 

- so putting 1.) and 2.) together… are companies getting enough pricing today and in the coming years to offset rising inflation? 

3.) BIG drop in book value/share: fell 11% from Dec 31. Investment portfolio swung from a gain of $3.05 billion (Dec 31) to a loss of $1.77 billion (March 31) = $4.82 billion swing (pre-tax).
 

Insurers are priced most commonly by applying a multiple to BV… looks to me like the bond bubble resulted in inflated book values for most insurers. It will be VERY interesting to see where book values go for insurance companies when they report Q1 results. And if interest rates continue higher in Q2 (which they are so far) then we will likely see another bit hit to BV in Q2. We could see some insurance companies report BV declines of close to 20% in 1H of 2022. Holy moly Batman. (Does this perhaps explain the spike we have seen in Fairfax shares over the past month?)
 

Yes, higher interest rates will provide some benefit to insurers via higher interest income. However, this will take time to work its way into earnings. I think Travellers said about 10% of its bond portfolio rolls off each year (this must be excluding short term investments). 

—————

Post results, RBC took their 2022 and 2023 EPS estimates for Travelers UP and at the same time took their price target DOWN. 
 

Estimates: We are revising our 2022 EPS estimate to $13.55 (from $12.94), reflecting Q1 upside as well as a positive benefit on investment yields. Our 2023 EPS forecast goes to $15.00 (from $13.70) and largely reflects better assumed investment yields relative to our previous expectations.

 

Price target: We are revising our price target to $183 (from $190), which is now based on 1.5x our ending 2023 book value per share estimate (previously was based on 1.4x our ending 2023 BV/share estimate). The revised multiple reflects reduced book value assumptions that are reflective of the recent rise in interest rates and its impact on GAAP book 

—————

Travelers Q1 Release - Shareholders’ Equity: Shareholders’ equity of $25.531 billion decreased 12% from year-end 2021, primarily due to net unrealized investment losses compared to net unrealized investment gains at year-end 2021, resulting from higher interest rates, common share repurchases and dividends to shareholders, partially offset by net income of $1.018 billion. value (not on operating fundamentals).

 

Net unrealized investment losses included in shareholders’ equity were $1.770 billion pre-tax ($1.391 billion after- tax) compared to net unrealized investment gains of $3.060 billion pre-tax ($2.415 billion after-tax) at year-end 2021.

 

Book value per share of $106.40 decreased 5% from March 31, 2021 and decreased 11% from year-end 2021. Adjusted book value per share of $112.19, which excludes net unrealized investment gains (losses), increased 11% over March 31, 2021 and 2% over year-end 2021.

Edited April 20, 2022 by Viking

[Parsad]

8 hours ago, Viking said:

Well Travelers got Q2 earnings for insurance companies going before markets opened today. How did they do? Shares sold off 5%. So not great (according to Mr Market). Why? Not sure, but here are a few possibilities:

1.) hard market looking long in the tooth 

2.) at the same time rising inflation looks to be an emerging issue 

- so putting 1.) and 2.) together… are companies getting enough pricing today and in the coming years to offset rising inflation? 

3.) BIG drop in book value/share: fell 11% from Dec 31. Investment portfolio swung from a gain of $3.05 billion (Dec 31) to a loss of $1.77 billion (March 31) = $4.82 billion swing (pre-tax).
 

Insurers are priced most commonly by applying a multiple to BV… looks to me like the bond bubble resulted in inflated book values for most insurers. It will be VERY interesting to see where book values go for insurance companies when they report Q1 results. And if interest rates continue higher in Q2 (which they are so far) then we will likely see another bit hit to BV in Q2. We could see some insurance companies report BV declines of close to 20% in 1H of 2022. Holy moly Batman. (Does this perhaps explain the spike we have seen in Fairfax shares over the past month?)
 

Yes, higher interest rates will provide some benefit to insurers via higher interest income. However, this will take time to work its way into earnings. I think Travellers said about 10% of its bond portfolio rolls off each year (this must be excluding short term investments). 

—————

Post results, RBC took their 2022 and 2023 EPS estimates for Travelers UP and at the same time took their price target DOWN. 
 

Estimates: We are revising our 2022 EPS estimate to $13.55 (from $12.94), reflecting Q1 upside as well as a positive benefit on investment yields. Our 2023 EPS forecast goes to $15.00 (from $13.70) and largely reflects better assumed investment yields relative to our previous expectations.

 

Price target: We are revising our price target to $183 (from $190), which is now based on 1.5x our ending 2023 book value per share estimate (previously was based on 1.4x our ending 2023 BV/share estimate). The revised multiple reflects reduced book value assumptions that are reflective of the recent rise in interest rates and its impact on GAAP book 

—————

Travelers Q1 Release - Shareholders’ Equity: Shareholders’ equity of $25.531 billion decreased 12% from year-end 2021, primarily due to net unrealized investment losses compared to net unrealized investment gains at year-end 2021, resulting from higher interest rates, common share repurchases and dividends to shareholders, partially offset by net income of $1.018 billion. value (not on operating fundamentals).

 

Net unrealized investment losses included in shareholders’ equity were $1.770 billion pre-tax ($1.391 billion after- tax) compared to net unrealized investment gains of $3.060 billion pre-tax ($2.415 billion after-tax) at year-end 2021.

 

Book value per share of $106.40 decreased 5% from March 31, 2021 and decreased 11% from year-end 2021. Adjusted book value per share of $112.19, which excludes net unrealized investment gains (losses), increased 11% over March 31, 2021 and 2% over year-end 2021.

 

Too be expected.  Most insurers will take a hit this quarter and next with the dramatic drop in bond prices.  Fairfax may take the least hit of all reinsurers with so much of their portfolio sitting in shorter bonds and cash.  Some of this will continue to be offset by firm insurance pricing.  

 

With rising interest rates, the risk free return versus current return on equities has to also be considered.  We've seen some volatility, and a correction in the most overvalued sectors, but the overall market will continue to correct as rates continue to rise. 

 

This also bodes well for Fairfax over 2022 and into 2023...they will be able to put significant amounts of cash to work in bonds and other securities...increasing interest income, dividend income and possible capital gains.  It's when shit hits the fan that Fairfax builds their reputation and book.  Cheers!

[Fundmanagerthrwawy]

Hi all, I had never heard of Fairfax before learning of this site. I was wondering if anyone could link me to good information sources regarding the company.

Thanks. 

[gfp]

6 minutes ago, Fundmanagerthrwawy said:

Hi all, I had never heard of Fairfax before learning of this site. I was wondering if anyone could link me to good information sources regarding the company.

Thanks. 

 

Well the annual reports are the best information source and they are easy to find.  

https://www.fairfax.ca/financials/annual-reports/default.aspx

 

Just the annual letters are here:

https://www.fairfax.ca/financials/letter-to-shareholders/default.aspx

 

There was also a book they put out called "Fair and Friendly, the first 25 years of Fairfax Financial" that is probably not easy to find.

[Viking]

Well Fairfax AGM just finished. Overall, it provided a great overview of the company. Here are some of my key take-aways. Does anyone know where to get a copy of the powerpoint presentation Prem made? Please feel free to correct my errors:

 

1.) in Q1 purchased $7.5 billion in 1-2 year bonds… did i get this right? Big news if so. Interest income will be increasing…

100 basis point move in interest rates will increase interest income by $222 million and ALSO result in $294 unrealized loss on bonds (pre-tax). 200 basis point increase will result in $444 million increase in interest income and also result in $550 million unrealized loss on bonds (pre-tax).

 

2.) EXCO: nat gas producer. Sounds like their production is hedged out 1 year?

3.) Hard market: Andy Bernard

- growing significantly during hard market bodes well for underwriting results in future. 
- Fairfax is on the right side of so many forces in the industry (i think he means hard market, increase in bond yields, improving results of value investing).

- when they happen, hard markets have a way of re-arranging the insurance industry. Fairfax will be on the right side of the coming re-arranging.

- insurance market remains very favourable.

- Fairfax has been able to take advantage of hard market more than any other large insurer - 25% growth in 2021

4.) Northbridge - Sylvie: 91% customer retention (very high, especially given hard market). A lot of momentum in 2022. Inflation emerging watch out.

5.) Allied - President: doubled in size since being acquired by Fairfax.
- Reasons that started hard market are still in place.

- Pricing is continuing upward but at lower rate.

6.) Odyssey - Brian Young: doubled business last 3 years. Premium growth was only 50% from 2003 to 2018. Company IS VERY DISCIPLINED. 
- three businesses: 1.) Re, 2.) Hudson (US insurance), 3.) Newline (international insurance). 
- all 3 are growing rapidly. Past couple of years Hudson and Newline posted higher growth. Expects Re-insurance to lead growth in 2022.

- growth is moderating

- how do we measure performance? Underwriting profitability. 10 year CR = 92. 5 year CR = 96.4. Fall off in performance the last 5 years due to poor re-insurance results, which is due to elevated catastrophe losses.

- Last 5 years the re-insurance industry achieved a CR = 101.

- rates are moderating; inflation is an emerging risk.

7.) Capital adequacy - Peter Clark: Despite growth in premiums of 20% in 2020 and 25% in 2021, Fairfax is in very good shape.

8.) Eurobank - CEO: guiding to EPS of €0.14 (not €1.40 i had in my original post); TBV/share = €1.40

9.) Digit - CEO: platform - focus on India next 2 years. Might be opportunity to take platform outside of India after that.

10.) Kennedy Wilson CEO: 1st mortgage platform with Fairfax - 100% of loans are floating rate. Will benefit from rising rates. Avg size of loans 7-8 mill. 

- for KW, 90% of their debt is fixed rate of 3.5% for 7years.

- KW has had many partners over the years; Fairfax is by far the best. 
- partnership with Fairfax started in 2010; done more than $10 billion in deals; realized 75%; generated returns +20%.

Edited April 22, 2022 by Viking

[Xerxes]