Fairfax 2022

[petec]

On 7/13/2022 at 6:07 PM, TwoCitiesCapital said:

10-year yields back down to 2.9-3.0% after tagging 3.4% a month ago. Markets beginning to price in cuts in Q1 2023 already. 

 

2s-10s most inverted since 2007. 3M-10s probably likely to follow in the next 2-3 months with additional hikes. 

 

Really hoping Fairfax is considering extending duration some. Will be a shame if this plays out the exact same way as 2018-2020 and they miss the opportunity to add duration again and we continue the multi year trend of declining investment income before rates rise again. 

 

Not suggesting they take the whole portfolio out to 7-10 years, but at least a portion of it! 

I’m agnostic here. I don’t really think they should be aiming to trade short/medium term moves and I don’t have a really strong view on whether rates are higher or lower in 5/10 years. 

[TwoCitiesCapital]

3 hours ago, petec said:

I’m agnostic here. I don’t really think they should be aiming to trade short/medium term moves and I don’t have a really strong view on whether rates are higher or lower in 5/10 years. 

 

Whether or not we think they should or not is irrelevant. They do as demonstrated by the move to dump ALL of their bonds in 2016. Which worked great for 2-years, but then the failure to renter in 2018 just meant it was all reversed and share holder paid the price with near zero interest income for 5 years. 

 

We now have another opportunity to re-enter bonds having missed much of the pain in bonds this year. Maybe take the duration of the portfolio out to 4 from 2ish now that rates are up 150-175 bps over the last year. 

 

That way they can lock in some of these 3%-ish type yields for the next several years if the bond market is right about a recession being around the corner. Might even pick up some capital gains if the Fed is forced to cut and still not taking a ton of duration risk if yields continue to rise because you can roll 10-20% of the portfolio into those higher yields every year as bonds come due and pay interest. 

 

 

 

 

Edited July 15, 2022 by TwoCitiesCapital

[Daphne]

National Bank With P&C Insurance Q2 Preview 

 

MIDNIGHTTRADER - Updated just now 

01:00 PM EDT, 07/25/2022 (MT Newswires) -- National Bank says the P&C sector remains well positioned for the near term given hard market conditions and rising interest rates that support improved investment income (in particular for Fairfax Financial). 

National's view is that pricing trends will continue to outpace loss cost trends overall, even for Personal Auto lines, as driving behaviour has yet to complete its path to normalization and auto repair / parts price increases still lag U.S. trends.

1. Trisura Group remains Top Pick with an Outperform rating and $60 target (unchanged).

2. Fairfax Financial remains Best Value idea in its coverage, with an Outperform rating and $1,050 target (unchanged).

3. Intact Financial has an Outperform and $227 target (down from $230).

IFC continues to merit a premium valuation as National expects the company will i) successfully integrate and operate RSA's Canada and UK&I operations (delivering on synergy upside); and ii) produce roughly mid-teens OROE through 2023 and beyond. While risk to Personal Auto profitability has risen given inflationary forces seen in the U.S., National believes rate increases will continue to outpace loss cost trends. Persistent hard market conditions also increase the likelihood IFC will deliver earnings outperformance in the near term. IFC delivered total company combined ratio of ~95% in 2018 and 2019 compared to ~89% in 2020 and 2021. National is forecasting ~92% in 2022 and 2023, which may still prove conservative given recent performance in hard market conditions.

4. Definity Financial is a "land grab story with an ROE expansion kicker with an Outperform rating and $38 target (unchanged).

 

 

[glider3834]

I was listening to WRB earnings call for Q2 - highly worth a listen - Rob Berkley highlighted how WRB's paid loss ratio (this is a hard number as its what an insurer has actually paid on claims) is in a falling trend - WRB are being cautious as there are still delays due to covid in court system, inflation trends etc, but it also is one data point that could suggest WRB is potentially giving themselves extra cushion on loss reserves that could potentially lead to redundancies later on if those loss picks prove too conservative - but again only time will tell!

 

'Loss ratio is the losses an insurer incurs due to paid claims as a percentage of premiums earned.' Investopedia

 

One other piece on the loss ratio, and I think I shared this with all last quarter. And for us, it's just one of many data points that we pay attention to, and perhaps, it's of interest to you all and that's the paid loss ratio. From our perspective, it is an important data point. It's not the whole story, but an important data point.

So here's a little bit of historical perspective for you again on Q2. And I'm going to give you what the paid loss ratio was going back to 2017 for Q2, that creates as much of an apples-to-apples basis as we can, at least using shorthand. So the paid loss ratio Q2 in '17 was a 55.9. In '18, it was a 58.3. In '19, it was a 53.8. In 2020, it was 52.9. In '21, it was a 44.3. And in '22, it was 41.9. So obviously, an attractive trend. Doesn't necessarily tell the whole story. But again, from our perspective, a meaningful data point and an encouraging indicator.

 

 

I looked at the paid loss ratio for Fairfax looking at 1Q results over 2017 to 2022 and this is also in a falling trend (again try to avoid mistakes but please do your dd)  - worth continuing to track this data point

 

 

 

 

Edited July 25, 2022 by glider3834

[Viking]

With the Fairfax Q2 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 that others are looking out for?

 

Insurance:

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

2.) is CR below 95? Below 94?

3.) is hard market still alive and kicking? Outlook for remainder of 2022?
Bond portfolio

4.) what kind of increase do we see in interest income?

5.) what changes do we see in bond portfolio?
6.) what is average duration? (1.4 years at March 31)

7.) what is amount of mark to market loss? US$400-500 million?

Equity Portfolio 

8.) what is amount of mark to market loss? (My estimate is around $1 billion)

Other

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

10.) Book value? Was US$626/share March 31

11.) share buybacks during quarter? (At March 31, 2022 there were 23,810,965 common shares effectively outstanding.)

12.) capital allocation priority moving forward?

- level of debt is ok

- continue to fund growth at subs in hard market?

- buy back stock?

- buy out minority shareholders in Allied World?

Updates/Commentary:

13.) pet insurance sale: on track? To close when? Proceeds to be used for?

14.) Resolute Forest Products sale: to close when? (I think i read Q1 2023 due to needed regulatory approvals)
15.) Stelco dutch auction: will Fairfax be tendering shares?

16.) was regulatory approval received to take control of Digit?

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

Edited July 27, 2022 by Viking

[KPO]

3 hours ago, Viking said:

With the Fairfax Q2 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 that others are looking out for?

 

Insurance:

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

2.) is CR below 95? Below 94?

3.) is hard market still alive and kicking? Outlook for remainder of 2022?
Bond portfolio

4.) what kind of increase do we see in interest income?

5.) what changes do we see in bond portfolio?
6.) what is average duration? (1.4 years at March 31)

7.) what is amount of mark to market loss? US$400-500 million?

Equity Portfolio 

8.) what is amount of mark to market loss? (My estimate is around $1 billion)

Other

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

10.) Book value? Was US$626/share March 31

11.) share buybacks during quarter? (At March 31, 2022 there were 23,810,965 common shares effectively outstanding.)

12.) capital allocation priority moving forward?

- level of debt is ok

- continue to fund growth at subs in hard market?

- buy back stock?

- buy out minority shareholders in Allied World?

Updates/Commentary:

13.) pet insurance sale: on track? To close when? Proceeds to be used for?

14.) Resolute Forest Products sale: to close when? (I think i read Q1 2023 due to needed regulatory approvals)
15.) Stelco dutch auction: will Fairfax be tendering shares?

16.) was regulatory approval received to take control of Digit?

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

Good list. Closing out the swap contracts would be another. At this stage I’d prefer straight buybacks or tenders like they did late last year. 

[Parsad]

Insurance:

1.) does top line growth remain close to 20%?  I would imagine will be close to that.

2.) is CR below 95? Below 94?  I imagine it will be 94, but would like to see 93.

3.) is hard market still alive and kicking? Outlook for remainder of 2022?  From what I've read, the hard market continues well into 2023.
Bond portfolio

4.) what kind of increase do we see in interest income?  Brian usually surprises us with his moves...at the same time, we expect interest rates to continue to rise through the next quarter.

5.) what changes do we see in bond portfolio?  If they've bought bonds, it will be higher rate 2-5 year stuff.
6.) what is average duration? (1.4 years at March 31)  I imagine this stretched out a wee bit...probably closer to 2.

7.) what is amount of mark to market loss? US$400-500 million?  Maybe slightly less...$350M.

Equity Portfolio 

8.) what is amount of mark to market loss? (My estimate is around $1 billion)  Suspect your estimate is probably correct...will be offset in 3rd Q by rebound and gains from sales.

Other

9.) share of profits of associates? $200 million?  Your guess is as good as mine.

10.) Book value? Was US$626/share March 31  I imagine BV dropped to around $605...losses partially offset by insurance profits.

11.) share buybacks during quarter? (At March 31, 2022 there were 23,810,965 common shares effectively outstanding.)  They've been buying...maybe 300K shares or so.

12.) capital allocation priority moving forward?  One I would add is have they been allocating any capital into markets with some stocks down 50-90%?

- level of debt is ok

- continue to fund growth at subs in hard market?  Probably.

- buy back stock? Probably.

- buy out minority shareholders in Allied World?  They'll probably listen to you.

Updates/Commentary:

13.) pet insurance sale: on track? To close when? Proceeds to be used for?

14.) Resolute Forest Products sale: to close when? (I think i read Q1 2023 due to needed regulatory approvals)
15.) Stelco dutch auction: will Fairfax be tendering shares?

16.) was regulatory approval received to take control of Digit?

 

Cheers!

[Crip1]

Q2 - Haven't read yet.

 

https://www.fairfax.ca/news/press-releases/press-release-details/2022/Fairfax-Financial-Holdings-Limited-Financial-Results-for-the-Second-Quarter/default.aspx

 

-Crip

 

[Parsad]

9 minutes ago, Crip1 said:

Q2 - Haven't read yet.

 

https://www.fairfax.ca/news/press-releases/press-release-details/2022/Fairfax-Financial-Holdings-Limited-Financial-Results-for-the-Second-Quarter/default.aspx

 

-Crip

 

 

Well, I was a bit optimistic!  Great 20%+ growth in insurance, they put about $10B into 1-2 year short-term bonds, and interest income and insurance profits have grown dramatically.  Huge losses in equities and some bond losses...greater than I expected.  Book value dropped to $588!  Doesn't look like they bought any shares back in the quarter. 

 

If Fairfax's portfolio got hit that bad and they were positioned better than anyone else, this is going to be one shitty quarter for many insurers.  Probably a buying opportunity in the insurance sector if prices fall as the insurance business is doing well and these are temporary portfolio losses for many insurers.  Cheers!

[matthew2129]

Would have liked to see them nibble on long term bonds and extend the duration of the portfolio during the q2 spike in rates, but oh well, guess you can't teach an old dog new tricks

[Crip1]

15 minutes ago, Parsad said:

 

Well, I was a bit optimistic!  Great 20%+ growth in insurance, they put about $10B into 1-2 year short-term bonds, and interest income and insurance profits have grown dramatically.  Huge losses in equities and some bond losses...greater than I expected.  Book value dropped to $588!  Doesn't look like they bought any shares back in the quarter. 

 

If Fairfax's portfolio got hit that bad and they were positioned better than anyone else, this is going to be one shitty quarter for many insurers.  Probably a buying opportunity in the insurance sector if prices fall as the insurance business is doing well and these are temporary portfolio losses for many insurers.  Cheers!

I didn't even attempt to put a number on the MTM losses on the equity portfolio, but we all knew it would be bad and it certainly was. Worth noting that half of Q2's loss S&P loss and 2/3rds of BB's Q2 loss have come back in the first month of Q3. 

This may have been my favorite part: Given the low duration of the bond portfolio if the investments are held to maturity a significant portion of the net unrealized losses recorded in the first six months of 2022 of $965 million will be reversed in the next 12 to 18 months. Interest and dividend income increased from a run rate of approximately $530 million annually at the end of 2021 to a current normalized rate of approximately $950 million annually.

[Crip1]

9 minutes ago, matthew2129 said:

Would have liked to see them nibble on long term bonds and extend the duration of the portfolio during the q2 spike in rates, but oh well, guess you can't teach an old dog new tricks

I respectfully disagree...love the 2-Year bond purchase from a risk-reward perspective. 

 

-Crip

[MMM20]

12 minutes ago, Crip1 said:

I respectfully disagree...love the 2-Year bond purchase from a risk-reward perspective. 

 

-Crip

Agreed, when the yield curve is flat, why go out in duration unless you want the convexity b/c you’re betting on rates falling from here. You are getting way more risk and no extra reward on a YTM basis.

 

I don’t see anything surprising in the release. I’m guessing market will disagree for one reason or another. Maybe the higher interest/dividend income gets capitalized and that gets the stock moving to $600 plus but who knows.

 

 

Edited July 28, 2022 by MMM20

[glider3834]

still looking at Q2 result - heaps of moving parts but just tallying transactions coming up & MTM bonds (& not factoring in Stelco)

 

after -tax impact estimate

Pet insur/JAB                        975  

Bonds MTM reversal           805 estimate  (965 pre-tax) (assuming bonds held to maturity)

Digit gain                             400

Resolute gain                      150  (180 pre-tax)

 

total                                    $ 2.33 bil  (just under $100 per share)

 

Edited July 28, 2022 by glider3834

[Viking]

Surprisingly in-line quarter. Crazy volatility with investments (expected given we are in the middle of a bear market). Tailwinds just keep getting better…

 

Insurance: 

1.) does top line growth remain close to 20%? Yes +24.9% (net premiums written)

2.) is CR below 95? Below 94? Solid 94.1%

3.) is hard market still alive and kicking? Outlook for remainder of 2022? TBD
Bond portfolio

4.) what kind of increase do we see in interest income? Solid increase in Q2 from $161 to $$203 million

5.) what changes do we see in bond portfolio? Bought a little more 1-2 yr bonds
6.) what is average duration? (1.4 years at March 31) At 1.2 years

7.) what is amount of mark to market loss? US$400-500 million? $413 million

Equity Portfolio 

8.) what is amount of mark to market loss? (My estimate is around $1 billion) Equity/Other = $1.135 billion

Other

9.) share of profits of associates? $200 million? $257 million 

10.) Book value? (Was US$626/share March 31) $588

11.) share buybacks during quarter? (At March 31, 2022 there were 23,810,965 common shares effectively outstanding.) June 30 there were 23,654,827 shares outstanding. Suggests 156 million shares were repurchased during the quarter = 0.66%

12.) capital allocation priority moving forward? TBD

- level of debt is ok

- continue to fund growth at subs in hard market?

- buy back stock?

- buy out minority shareholders in Allied World?

Updates/Commentary:

13.) pet insurance sale: on track? To close when? Proceeds to be used for?

- expected to close in 2H. On closing after tax gain = $975 million.

14.) Resolute Forest Products sale: to close when? 
- expected to close 1H 2023. Est pre-tax gain = $180 million + value of CVR (max $180 million)
15.) Stelco dutch auction: will Fairfax be tendering shares? TBD

16.) was regulatory approval received to take control of Digit? Not yet.

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

—————

Other notes from Q2 release:

- Farmers Edge impairment charge = $109 million

- Grivalia Hospitality stake increased from 33.5% to 78.4% for $195 million

Edited July 28, 2022 by Viking

[lessthaniv]

Great summary. Looking forward to the CC tomorrow. 

(1 edit ... buyback was 156K shares not 156M)

 

[StubbleJumper]

I like this quarter's results.  The fundamentals are sound with excellent underwriting and improved interest and dividend income.  I like what they've done with the fixed income portfolio, and expect that they'll keep rolling it over the next year. 

 

Was anyone else surprised that they've really, really not reached for yield?  If anything they've gravitated towards sovereigns and other AAA.

 

The revolver was renewed, which is great.  You want to see that being done at a point when they don't actually need it.  But, what do folks make of the holdco "cash" situation?  I put quotations around the word cash for a reason.  Note 5 does not give me much reassurance as cash and investments are down to $1b and it looks like they really only have about $600m of true liquidity available.  Thank Christ for that revolver because they might actually need it.

 

Okay, so how will Mr. Market respond to this?  Were the superficial numbers shitty enough to trigger a slide in FFH's share price?  We know that there are considerable gains that will be realised in Q3, and possibly Q4.  Will the market react badly to the headline numbers and give us prices that will be favourable for repurchases and to add to our position?

 

I like it.

 

 

SJ

[matthew2129]

2 hours ago, MMM20 said:

Agreed, when the yield curve is flat, why go out in duration unless you want the convexity b/c you’re betting on rates falling from here. You are getting way more risk and no extra reward on a YTM basis.

 

 

 

The risk is that in 2 years from now interest rates are back to near zero and interest income is back in the toilet along with it. When you have long term liabilities, investing in long term assets that you can hold to maturity is not a real risk imho

[gary17]

i think market will react slowly and wait for analysts to comment.

 

i do not believe market will get it any closer to book value anytime soon though.

[petec]

7 hours ago, MMM20 said:

Agreed, when the yield curve is flat, why go out in duration unless you want the convexity b/c you’re betting on rates falling from here. You are getting way more risk and no extra reward on a YTM basis.

Exactly.

[petec]

4 hours ago, matthew2129 said:

When you have long term liabilities, investing in long term assets that you can hold to maturity is not a real risk imho

 

I think this is a dangerous assumption. There’s no reason to believe the liabilities and the bonds are a great hedge, especially when inflation (which impacts claims) might well run ahead of rates for a good while. 

What is the duration of their liabilities?

[petec]

5 hours ago, StubbleJumper said:

But, what do folks make of the holdco "cash" situation? 

Personally not something I worry about much given the JAB deal and the underwriting profits, which give the subs more dividend capacity. 
 

I also think the reduced leverage and the increasingly “hard” book value (not long ago a lot of it was intangible) means there’s space to issue a bond if needed. There might be a risk of rising leverage, but I don’t think there’s a liquidity risk brewing. 

[Xerxes]

I like how Prem answers the Q&A

 

he disarms the analyst by first saying “that was a good question” and than he answers but doesn’t really. 

[StubbleJumper]

2 minutes ago, Xerxes said:

I like how Prem answers the Q&A

 

he disarms the analyst by first saying “that was a good question” and than he answers but doesn’t really. 

 

I wish that Prem would punt more of the questions to the other officers (like Jen Allen), then if he wants, he can chime in with his 25 cents after the other officers offer a clear and cogent response.  But, I don't find that the "Prem fuddle" alone is very helpful.

 

 

SJ

[Xerxes]

Agreed

 

looks like no one asked about Stelco