Fairfax 2022

[maxthetrade]

Berkley posted another fantastic quarter, should bode well for Fairfax:

 

-Net premiums written increased 26.6%.

-The current accident year combined ratio before catastrophe losses of 2.2 loss ratio points was 86.0%.

-The reported combined ratio was 88.2%, including catastrophe losses of $48.5 million.

-Average rate increases excluding workers' compensation were approximately 9.3%.

 

Robust premium growth was driven by continued strong rate increases in nearly all lines of business combined with higher exposure growth. Record underwriting income in the quarter reflected year-over-year margin improvement and a further reduction in the expense ratio. We anticipate that the factors fueling the Company’s growth should remain in place for the foreseeable future and that compounding rate increases in excess of loss trend will further contribute to underwriting profits as premiums are fully earned.

[Parsad]

32 minutes ago, maxthetrade said:

Berkley posted another fantastic quarter, should bode well for Fairfax:

 

-Net premiums written increased 26.6%.

-The current accident year combined ratio before catastrophe losses of 2.2 loss ratio points was 86.0%.

-The reported combined ratio was 88.2%, including catastrophe losses of $48.5 million.

-Average rate increases excluding workers' compensation were approximately 9.3%.

 

Robust premium growth was driven by continued strong rate increases in nearly all lines of business combined with higher exposure growth. Record underwriting income in the quarter reflected year-over-year margin improvement and a further reduction in the expense ratio. We anticipate that the factors fueling the Company’s growth should remain in place for the foreseeable future and that compounding rate increases in excess of loss trend will further contribute to underwriting profits as premiums are fully earned.

 

Nice!  Great for insurers.  Cheers!

[glider3834]

1 hour ago, maxthetrade said:

Berkley posted another fantastic quarter, should bode well for Fairfax:

 

-Net premiums written increased 26.6%.

-The current accident year combined ratio before catastrophe losses of 2.2 loss ratio points was 86.0%.

-The reported combined ratio was 88.2%, including catastrophe losses of $48.5 million.

-Average rate increases excluding workers' compensation were approximately 9.3%.

 

Robust premium growth was driven by continued strong rate increases in nearly all lines of business combined with higher exposure growth. Record underwriting income in the quarter reflected year-over-year margin improvement and a further reduction in the expense ratio. We anticipate that the factors fueling the Company’s growth should remain in place for the foreseeable future and that compounding rate increases in excess of loss trend will further contribute to underwriting profits as premiums are fully earned.

Interesting for 4Q - WRB had Insurance CR 88.1 4Q (vs 89.9 2Q) and Reinsurance/Monoline excess CR 88.4 4Q (vs 88.6 2Q)

 

That suggests to me that potentially Fairfax's underwriting profit could be closer to 2Q result which was a record & in the 94-95 area. I am just adding a proviso here that they are doing their annual reserve reviews so that could have an impact. But overall it does look positive for Fairfax IMO.

[Viking]

18 hours ago, maxthetrade said:

Berkley posted another fantastic quarter, should bode well for Fairfax:

 

-Net premiums written increased 26.6%.

-The current accident year combined ratio before catastrophe losses of 2.2 loss ratio points was 86.0%.

-The reported combined ratio was 88.2%, including catastrophe losses of $48.5 million.

-Average rate increases excluding workers' compensation were approximately 9.3%.

 

Robust premium growth was driven by continued strong rate increases in nearly all lines of business combined with higher exposure growth. Record underwriting income in the quarter reflected year-over-year margin improvement and a further reduction in the expense ratio. We anticipate that the factors fueling the Company’s growth should remain in place for the foreseeable future and that compounding rate increases in excess of loss trend will further contribute to underwriting profits as premiums are fully earned.

Great results from WRB. Top line growth of +25%? Nuts. CR sub 90 means strong earnings from underwriting. Most important: no end in sight to hard market. This is VERY BULLISH for all insurers.

 

The other item WRB highlighted: “do not underestimate the leverage in the investment portfolio”. Their bond portfolio has short duration. “This positioning came with a short term cost.” They are poised to take advantage of higher rates. 
 

WRB says “2022 will be an excellent year.” Why? Hard market + higher interest/dividend income = much higher operating income = much higher earnings. 
————-

The hard market continuing to roll along is very good news for Fairfax. My guess is we see net premiums written growth of +20% in Q4 and it appears 2022 is starting the same way. 
 

In 2021 one of my big reasons for holding Fairfax in size was the leverage in the investment portfolio from HIGHER STOCK PRICES. In 2022 perhaps the higher leverage for Fairfax’s investment portfolio will come from the cash/bond portfolio and not the equity holdings. They are VERY short duration. If they are able to redeploy a meaningful amount of their cash/bonds into higher yields their interest and dividend income will pop.
 

Much higher underwriting income + much higher interest and dividend income = much higher operating earnings. Mr Market pays a premium for this type of earnings. Perhaps this is the path to a higher multiple for Fairfax’s stock price.

Edited January 28, 2022 by Viking

[Viking]

Fairfax has had an outstanding 2021. In fact it was one of the best years in Fairfax’s history. Below is a Top 10 list of what drove value for shareholders of Fairfax in 2021. What is missing?

—————
At the bottom of this post are links to similar lists compiled for 2019 and 2020. 

—————

I would characterize 2021 as the year the ‘new Fairfax’ finally started emerging for all to see. Fairfax had been making important changes under the hood for the past 4-5 years and 2021 was the year all the hard work finally started to be reflected in the reported financial results. The Fairfax 'super tanker' finally appears to be headed in the right direction and building value at a solid rate for shareholders again.

 

FFH stock price increased 45% in 2021

- Dec 31, 2021 = $492.13; Dec 31, 2020 = US$340

BV increased 18% in the 9 months to Sept 30 (BV will be higher when Q4 is reported)

- Sept 30, 2021 = US$561.88; Dec 31, 2020 = US$478.33; 

Dividend of US$10 dividend was paid Jan 2021

 

1.) net gains on investments of $2.5 billion (to Sept 30) = $96/share

- equities, Digit revaluation and FFH TRS

- does NOT include pending gain on Digit of $1.1 billion (Digit should be on its own but i decided to include it here). 

- FFH TRS: 1.96 million shares at cost of US$396/share. Classic Fairfax move: creative, unconventional, opportunistic, smart, well timed, profitable

 

2.) increase in fair value of Investments in associates of US$1,372 million (to Sept 30) = $53/share

- this gain is in addition to ‘gains on investments’ summarized above.

- this gain is NOT captured in BV.

 

3.) significant increase in net premiums written of US$2.3 billion (to Sept 30) = growth of 20.5%

- hard market that began in Q4 2019 is continuing as we begin 2022

 

4.) US$1 billion share buy back Dec: 2 million shares purchased (7% of shares outstanding) at US$500/share

- financed through sale of 10% interest in Odyssey for US$900 million

- share buybacks done below intrinsic value are very accretive for long term shareholders. 

- second classic Fairfax move of 2021: creative, opportunistic, smart, well timed

 

5.) debt reduction: total debt was paid down. Combined with significant earnings in 2021, debt ratios have improved considerably.

- largely paid with proceeds from sale of the remainder of Riverstone for US$700 million and 14% interest in Brit for US$375 million.

 

6.) underwriting profit increased $182 million (to Sept 30)

- YTD Sept 30, 2021 = $330; YTD Sept 30, 2020 = $142 million

- given hard market we should see continued improvement in underwriting profit in 2022 (as written premiums become earned)

 

7.) Fairfax’s two largest equity holdings look exceptionally well positioned as we begin 2022 and the shares are very cheap:

- Atlas: executed and completed financing on very aggressive new build strategy in 2021. Should drive 15-20% EPS growth per year next 3 years.

- Eurobank: completed multi-year fix of balance sheet in 2021 and is now poised to grow business and earnings and leverage improving Greek economy

 

8.) Gulf Insurance Group: completed acquisition of AXA Gulf, increasing size by about 40%

 

9.) a number of Fairfax equity holdings completed significant stock buy backs in 2021, significantly increasing Fairfax’s ownership percent: Fairfax India, Stelco, Resolute Forest Products

 

10.) changes at private holdings:

- Eurolife stake was increased to 80%

- Pethealth was folded into Crum (Jan 1, 2021)

- Toy ‘R Us retail operations were sold (kept real estate)

- Boat Rocker IPO - raised C$170 million - very opportunistic

- Farmers Edge IPO - raised C$125 million -very opportunistic (even though the business continues to struggle)

 

The bad

1.) drop in interest and dividend income of $109 million (to Sept 30)

- Sept 30 2021 = $496 million from Sept 30, 2020 = $605 million

- decline is due to Fairfax reducing duration on bond portfolio

- this strategy (low duration) carries a short term cost

- however, should bond yields move higher (as is currently happening as we begin 2022) Fairfax is well positioned to benefit

 

2.) continued losses from what is left of runoff; what will average loss be moving forward? -$25 million/quarter?

—————

2020 list: https://thecobf.com/forum/topic/17401-fairfax-2020/page/34/

- scroll down to Dec 28

—————

2019 list: https://thecobf.com/forum/topic/16444-fairfax2019/page/5/ 

- scroll down to Dec 28

Edited February 1, 2022 by Viking

[glider3834]

great summary Viking - not much to add

 

Just on those equity swaps - their avg cost I believe is US$373 - so likely sitting on a US$215 mil gain

 

Looking forward, I am curious if they made any additions with the recent market sell off. 

 

Fairfax is certainly better positioned than most of their peers to take advantage of higher interest rates, with shorter duration on their fixed income portfolio - I actually did a chart & posted on twitter but re-posting it below ( source Company Annual Reports 2020)

 

 

 

Edited February 2, 2022 by glider3834

[Crip1]

10 hours ago, glider3834 said:

great summary Viking - not much to add

 

Just on those equity swaps - their avg cost I believe is US$373 - so likely sitting on a US$215 mil gain

 

Looking forward, I am curious if they made any additions with the recent market sell off. 

 

Fairfax is certainly better positioned than most of their peers to take advantage of higher interest rates, with shorter duration on their fixed income portfolio - I actually did a chart & posted on twitter but re-posting it below ( source Company Annual Reports 2020)

 

 

 

The advantage of FFH's low duration is not going to show much in this earnings cycle. The 10-year treasury, for example, did not move terribly much in Q4 of 2021 compared to 2022 YTD. There will be an element of “Only when the tide goes out do you discover who's been swimming naked" when the Q1 2022 earnings are released. My curiosity with the Q4 2021 earnings release will be to see to what level, if any, FFH moved into longer duration bonds.

-Crip

[TwoCitiesCapital]

2 hours ago, Crip1 said:

The advantage of FFH's low duration is not going to show much in this earnings cycle. The 10-year treasury, for example, did not move terribly much in Q4 of 2021 compared to 2022 YTD. There will be an element of “Only when the tide goes out do you discover who's been swimming naked" when the Q1 2022 earnings are released. My curiosity with the Q4 2021 earnings release will be to see to what level, if any, FFH moved into longer duration bonds.

-Crip

 

They'll benefit from rolling 1-2 year bonds at higher rates. For instance, 1-year ago 2-year treasuries only paid 0.1-0.2%. now they're paying 1.2%. 

 

So interest income will have a massive YoY percentage gain, but the actual dollars to Fairfax will still be quite small. 

 

I doubt they moved into longer dated bonds. They passed on the opportunity to do so in 2018 @ 3.25% on the 10-year. As far as I know, they've never really addressed that or said anything to suggest that they view missing that as a mistake. So hard for me to believe they'll suddenly find value @ 1.8%. 

[Viking]

46 minutes ago, TwoCitiesCapital said:

 

They'll benefit from rolling 1-2 year bonds at higher rates. For instance, 1-year ago 2-year treasuries only paid 0.1-0.2%. now they're paying 1.2%. 

 

So interest income will have a massive YoY percentage gain, but the actual dollars to Fairfax will still be quite small. 

 

I doubt they moved into longer dated bonds. They passed on the opportunity to do so in 2018 @ 3.25% on the 10-year. As far as I know, they've never really addressed that or said anything to suggest that they view missing that as a mistake. So hard for me to believe they'll suddenly find value @ 1.8%. 

—————

@glider3834 ‘s chart on duration is very instructive. I expected Fairfax’s fixed income portfolio to be well positioned compared to peers. I did not expect them to be BEST POSITIONED among peers to benefit from rising rates. 

—————

Doesn’t Fairfax have like $15 billion just in cash and short term investments? We have seen about a 1% increase on the very short end so does this not suggest we should see interest income increase @ $150 million = +$10 million per month. What i like is Q4 should be the bottom in interest and dividend income; importantly, we should see that bucket shift from a headwind the past 2 years (dropping every quarter) to a tailwind moving forward (increasing every quarter). 
 

If the Fed actually increases rates 4 times in 2022 we should see short term rates move even higher. The interesting thing to watch is what happens to interest rates further out on the curve when the Fed starts to shrink its balance sheet later this year (June?). Chubb suggested we could see a steepening of the yield curve when this happens. 
 

The bottom line, IF interest rates (across the curve) continue to move higher Fairfax is exceptionally well positioned. Of course, they have to act. Their long term track record with the fixed income part of their investment portfolio is pretty good… so i am optimistic they will make some moves this year that will benefit shareholders.

 

[StubbleJumper]

23 minutes ago, Viking said:

Doesn’t Fairfax have like $15 billion just in cash and short term investments? We have seen about a 1% increase on the very short end so does this not suggest we should see interest income increase @ $150 million = +$10 million per month. What i like is Q4 should be the bottom in interest and dividend income; importantly, we should see that bucket shift from a headwind the past 2 years (dropping every quarter) to a tailwind moving forward (increasing every quarter). 

 

The short term has only moved about 50 bps over the past year ( https://www.bloomberg.com/markets/rates-bonds/government-bonds/us ), so unless they allocate more heavily into 2-yr or more, the effect will be about half of what you calculated.  It's still good, and it's still a low-risk increase in income.  

 

 

SJ

[Viking]

11 minutes ago, StubbleJumper said:

 

The short term has only moved about 50 bps over the past year ( https://www.bloomberg.com/markets/rates-bonds/government-bonds/us ), so unless they allocate more heavily into 2-yr or more, the effect will be about half of what you calculated.  It's still good, and it's still a low-risk increase in income.  

 

 

SJ

Thanks for the correction… i have not followed Fairfax’s fixed income portfolio very closely. Once they release the Annual Report perhaps more of a deep dive on that part of Fairfax’s investment portfolio is in order… Especially if inflation stays ‘persistently high’ into Q2 and bond yields continue to move higher over the year.

Edited February 2, 2022 by Viking

[Viking]

Chubb released strong results yesterday. On the conference call the CEO expected strong top and bottom line results to continue into 2022… bottom line, no end in sight to the current hard market. Another positive indicator for Fairfax and Q4 results. And should be a continued strong tailwind for Fairfax in 2022. A little crazy that Fairfax is trading at US$490 given their actual performance in 2021 and all the tailwinds as we begin 2022.
 

What is driving hard market today?

1.) social inflation - litigation - casualty

2.) inflation - property

3.) increased frequency of catastrophes

4.) climate change 

5.) growing threat of cybersecurity

Edited February 2, 2022 by Viking

[Parsad]

3 hours ago, Viking said:

Chubb released strong results yesterday. On the conference call the CEO expected strong top and bottom line results to continue into 2022… bottom line, no end in sight to the current hard market. Another positive indicator for Fairfax and Q4 results. And should be a continued strong tailwind for Fairfax in 2022. A little crazy that Fairfax is trading at US$490 given their actual performance in 2021 and all the tailwinds as we begin 2022.
 

What is driving hard market today?

1.) social inflation - litigation - casualty

2.) inflation - property

3.) increased frequency of catastrophes

4.) climate change 

5.) growing threat of cybersecurity

 

Markel also announced stellar results for the quarter and year:

 

https://www.markel.com/markel-corporation/news-and-press/markel-reports-2021-financial-results-17186

 

Bodes well for Fairfax's results!  Cheers!

[Viking]

Well, time to start banging the table again regarding how cheap Fairfax stock is today at US$490/share. Now part of the challenge today is the stock has increased 100% after hitting its pandemic low in April 2020. The stock was up 45% in 2021. So it is natural for investors to think Fairfax stock HAS to now be fully valued (or close to it) after such a spectacular increase over the past 20 months. 

 

To help me get some perspective i like to look at what their trading range for the stock looked like over the past 5 or so years compared to where it is trading today. And to overlay how the business is positioned (fundamentals) today compared to the past. 

 

This approach helped me when i was looking at oil stocks in December. Many large cap oil stocks were up +100-200% from their lows in 2020. So the natural conclusion is ‘missed that one’. But when i looked at oil stock prices from the past 5-10 years it was clear that most oil companies were still trading at or below historical levels. MAYBE oil stocks were STILL cheap? So i dug into the fundamental picture and discovered: record levels of free cash flow, aggressive debt pay-down (putting balance sheets in great shape), record oil demand, constrained oil supplies etc, etc. The conclusion? Oil company stocks were still cheap even after the big move higher in 2021. And oil stocks have rocked to start the year (timing was a fluke but, hey, that happens sometimes). And it looks like the run could continue given how poor sentiment was towards energy stocks at the start of the year (energy was VERY under-owned as an asset class). Everybody is loving energy today… what a pivot! Funny what a RISING STOCK PRICE does to investor sentiment (eventually). The shift in investor sentiment from fear to greed is usually a VERY good thing for share prices (that PE multiple expansion thing).

 

When i look at Fairfax today i see many of the same things. Fairfax’s current stock price today (US$490) is about where the stock was trading 7 years ago. COULD IT STILL BE CHEAP? What do the fundamentals say? The insurance side of Fairfax HAS NEVER BEEN POSITIONED BETTER. And it is not even close. The hard market has been driving top line growth for years (+20% just in 2021) and is poised to continue double digit growth in 2022. Supported by the hard market, underwriting profit should continue to increase and could come in at a record level in 2022. The equity part of the investment portfolio is very well positioned to deliver solid results in the coming years - backstopped by its 2 largest positions Atlas and Eurobank (both of which look like they are breaking out higher). The bond part of the portfolio is positioned perfectly for a rising interest rate environment which is exactly what is expected in 2022. Interest income is the one negative (down substantially the past few years); however, with interest rates now headed back higher this will flip from being a headwind to a tailwind in 2022. (Low interest rates is impacting ALL insurers and is a key driver of the hard market.) Importantly, we are also seeing a meaningful reduction in the share count - the Dutch auction in Dec lowered shares outstanding by 7% and we will likely see more of the same in 2022. And, yes, Fairfax will report blow out earnings for full year 2021 when it reports Q4 next week. And 2022 is positioned to be another very good year for earnings. Any way you look at it, Fairfax shares are ‘table pounding’ cheap at US$490/share. 
—————

My read is investor sentiment, while still low, is improving for Fairfax. Why is sentiment improving? The company is making good decisions. The company is executing well. And earnings are smoking. More of the same in 2022 and sentiment should continue to improve… and that should in turn drive multiple expansion.

Edited February 2, 2022 by Viking

[Thrifty3000]

At these prices I wish they'd cut the dividend to $0 and buy back more shares. I wonder if shareholders would vote in favor of reallocating the dividend to buybacks while the stock traded below a certain threshold?

[maxthetrade]

20 hours ago, Viking said:

Any way you look at it, Fairfax shares are ‘table pounding’ cheap at US$490/share. 

 

I agree, Fairfax looks pretty attractive at these prices and as you pointed out they are well positioned. I've thought about increasing my position but it's already huge.

[Xerxes]

There was a gentleman who was managing FFH's bond portfolio.

What happened to him ?  

 

I recall people were saying here how he is the bond-king etc. But i have not heard of his name praised in the past 24 months,

Or is his absence really a function of the bond portfolio sitting in semi-cash for 4 years now.

[cwericb]

55 minutes ago, maxthetrade said:

 

I agree, Fairfax looks pretty attractive at these prices and as you pointed out they are well positioned. I've thought about increasing my position but it's already huge.

Ditto. I am in the same position, I keep telling myself to be satisfied and look for other opportunities but ...

[Parsad]

10 hours ago, Xerxes said:

There was a gentleman who was managing FFH's bond portfolio.

What happened to him ?  

 

I recall people were saying here how he is the bond-king etc. But i have not heard of his name praised in the past 24 months,

Or is his absence really a function of the bond portfolio sitting in semi-cash for 4 years now.

 

Brian Bradstreet.  He is still there and still running the fixed income side, with help now from Wade Burton and Lawrence Chin.  It was probably Brian's decision to go cash heavy.  

 

And yes, he is probably a more qualified bond king than Jeff Gundlach, Bill Gross and the myriad other bond "kings" we hear of.  I think Brian's record over like almost 30 years beats the global corporate bond index by some 3 to 4 percent annualized.  That is some outlier!  Cheers! 

[Viking]

11 hours ago, cwericb said:

Ditto. I am in the same position, I keep telling myself to be satisfied and look for other opportunities but ...

I am a big believer in Druckenmiller’s strategy of sizing positions based on how asymmetrical the bet is. What are the chances Fairfax’s stock price drops 6-8% after earnings come out? What are the chances Fairfax’s stock price rises 6-8% after earnings come out? (Let’s say in the 30 days after earnings are released.)
 

Today i think the chance of a positive reaction in the stock price from a positive earnings surprise is much higher (70%?) than an negative reaction in the stock price from a negative earnings surprise (30%?). Why?

1.) 7% reduction in share count. Will this not materially impact year end reported book value? In a very good way?

- now i really do not understand how the sale of 10% of Odyssey will impact the financial statements (exactly where the ‘cost’ will show up). Or is the cost largely to be borne in the future via payments to lenders of $900 million?

2.) based on reporting from other P&C insurers my guess is Fairfax should report solid top line growth (+15-20%) and a decent CR (96?)

3.) solid investment gains in equity holdings - based on market moves in Q4

My guess is the benefit of the final mark up of the Digit revaluation will now come in Q1 given there have been no press releases on this topic (a +$35/share benefit).

 

With shares trading at US$495 (near historic lows… looking back 5 or 6 years) my guess is there is a higher probability that Fairfax shares trade higher after earnings given all the current tailwinds. 
—————

What are the key risks? 
1.) big increase in reserves for runoff

2.) big increase in reserves for Brit

3.) large losses at Kai - as it continues to scale (or busts)

4.) large write downs on one or more equity holdings - Farmers Edge? 
5.) large loss on short position in Tesla… just kidding… couldn’t help myself  

Edited February 4, 2022 by Viking

[Viking]

8 hours ago, Parsad said:

 

Brian Bradstreet.  He is still there and still running the fixed income side, with help now from Wade Burton and Lawrence Chin.  It was probably Brian's decision to go cash heavy.  

 

And yes, he is probably a more qualified bond king than Jeff Gundlach, Bill Gross and the myriad other bond "kings" we hear of.  I think Brian's record over like almost 30 years beats the global corporate bond index by some 3 to 4 percent annualized.  That is some outlier!  Cheers! 

US bonds are breaking higher by 10 basis points across the entire entire curve to new highs. As has been pointed out by Glider in a previous post Fairfax will be a HUGE winner should rates continue to move higher (given the insanely low average duration in their bond portfolio < 2 years). This is a $30 billion portfolio (if memory serves me correctly). Brian Bradstreet likely has a big smile on his face right now.

Edited February 4, 2022 by Viking

[StubbleJumper]

It actually is a bit of a tricky situation for the FFH bond team.  The good news is that rates are on the rise all across the curve.  The tricky part is what to do with duration in the short-term.  Five or six weeks ago, I suggested that the 2-yr treasury looks like it might be a bit of a sweet spot, achieving a balance between improving the current portfolio yield, while not really locking in a high duration.  But, it's very much decision-making under uncertainty as we know which direction the curve is headed, but we don't yet fully understand how far and how fast it will go.  My guess is that duration will remain pretty low and that FFH will not be rolling much of the portfolio into treasuries of more than 1-yr.

 

It's a good problem to have, and it's nice that FFH has guys like Bradstreet who have seen this type of thing in the past.

 

 

SJ

[Viking]

32 minutes ago, StubbleJumper said:

It actually is a bit of a tricky situation for the FFH bond team.  The good news is that rates are on the rise all across the curve.  The tricky part is what to do with duration in the short-term.  Five or six weeks ago, I suggested that the 2-yr treasury looks like it might be a bit of a sweet spot, achieving a balance between improving the current portfolio yield, while not really locking in a high duration.  But, it's very much decision-making under uncertainty as we know which direction the curve is headed, but we don't yet fully understand how far and how fast it will go.  My guess is that duration will remain pretty low and that FFH will not be rolling much of the portfolio into treasuries of more than 1-yr.

 

It's a good problem to have, and it's nice that FFH has guys like Bradstreet who have seen this type of thing in the past.

 

 

SJ

Yes, it is tricky. I am waiting to see what happens when we get balance sheet run off from the Fed. Some are thinking we could see the long end of the curve pop higher when this happens. And that will then allow the Fed to increase rates on the short end. Mt guess is the Fed does not want a flat or especially an inverted yield curve. I think the long end (10 year) is the one to watch. Pretty much everyone things the 10 year will not get much above 2%. But i wonder if this ‘analysis’ is not just recency bias. WHAT IF the 10 year actually moves closer to 3% later this year? What if the inflation numbers remain elevated into 2H 2022 (and don’t moderate in Q2)?

Edited February 4, 2022 by Viking

[Crip1]

9 hours ago, Viking said:

I am a big believer in Druckenmiller’s strategy of sizing positions based on how asymmetrical the bet is. What are the chances Fairfax’s stock price drops 6-8% after earnings come out? What are the chances Fairfax’s stock price rises 6-8% after earnings come out? (Let’s say in the 30 days after earnings are released.)
 

Today i think the chance of a positive reaction in the stock price from a positive earnings surprise is much higher (70%?) than an negative reaction in the stock price from a negative earnings surprise (30%?). Why?

1.) 7% reduction in share count. Will this not materially impact year end reported book value? In a very good way?

- now i really do not understand how the sale of 10% of Odyssey will impact the financial statements (exactly where the ‘cost’ will show up). Or is the cost largely to be borne in the future via payments to lenders of $900 million?

2.) based on reporting from other P&C insurers my guess is Fairfax should report solid top line growth (+15-20%) and a decent CR (96?)

3.) solid investment gains in equity holdings - based on market moves in Q4

My guess is the benefit of the final mark up of the Digit revaluation will now come in Q1 given there have been no press releases on this topic (a +$35/share benefit).

 

With shares trading at US$495 (near historic lows… looking back 5 or 6 years) my guess is there is a higher probability that Fairfax shares trade higher after earnings given all the current tailwinds. 
—————

What are the key risks? 
1.) big increase in reserves for runoff

2.) big increase in reserves for Brit

3.) large losses at Kai - as it continues to scale (or busts)

4.) large write downs on one or more equity holdings - Farmers Edge? 
5.) large loss on short position in Tesla… just kidding… couldn’t help myself  

Personally, I’ve given up trying to predict how the market will look at the earnings. Markel had a great quarter, beating all estimates handily yet is down 2-3% from where it ended pre-earnings-announcement. I really don’t disagree with anything you said about Fairfax as it is still my largest holding despite my tendering some of my shares to the Dutch Auction, but it’s hard to handicap the level with which this is asymmetrical when the market is so irrational.
-Crip 
 

[TwoCitiesCapital]

On 2/3/2022 at 3:28 PM, Xerxes said:

There was a gentleman who was managing FFH's bond portfolio.

What happened to him ?  

 

I recall people were saying here how he is the bond-king etc. But i have not heard of his name praised in the past 24 months,

Or is his absence really a function of the bond portfolio sitting in semi-cash for 4 years now.

 

They don't get much talk because they basically moved into short-term debt in 2016 and there hasn't been much to talk about since. 

 

The initial move was brilliant. Rates went up. But, they missed the re-entry in 2018 and so it's just been a matter of collecting lower and lower interest for the last 4-5 years as rates have moved lower. Nothing really to trade. No major gains/losses.

 

Bradstreet has a great track record for sure, but I do think it was a mistake to not have been inching out in 2018 into 2019 as the curve inverted and predicted a recession.  Missed the whole drop from 3.25% to 0.5% while collecting declining interest when could have been making capital gains and slightly higher interest. 

 

After getting the initial call right and missing 100+ bps of rate hikes, might've made sense to start locking some of that in even if you didn't go all of the way out to 10-years - particularly with the yield curve predicting lower rates to come. 

Edited February 4, 2022 by TwoCitiesCapital