Fairfax 2022

[Xerxes]

3 hours ago, Parsad said:

One other note.  Have any of you seen Prem put another $150M of his personal money into the stock lately?  No, because he knew it was stupid cheap back then.  That $150M will be $300M very soon!  Bet big, bet boldly when you know things are dirt cheap!  Cheers!

Was that a bet on Fairfax that he made, or a beta bet on central bank intervention producing results and using FFH as a vehicle to capture that since he knows it best and controls it. 
 

To me that was a beta bet for him and those of us who added in 2020, but to bet in 2022-23 on Fairfax that would be a true alpha bet on Fairfax’s unique attributes. 
 

 

 

Edited November 8, 2022 by Xerxes

[Viking]

Earlier today I provided an update on how underwriting profit was tracking at Fairfax. Let’s now take a look at interest and dividend income. Of all of the many positive developments at Fairfax in 2022, the increase in interest rates (and interest income) is one of the most exciting.

—————

Summary: Fairfax earned $568 million ($24/share) in interest income in 2021. For 2022, my estimate is $830 million ($35/share). For 2023, my estimate is $1.37 billion ($58/share) = $800 million increase over 2 years (2021 to 2023). Dividends will come in at around $110 million per year (not included in the numbers above).

—————

In 2021, Fairfax earned $568 million in interest income = 1.5% yield on $36.8 billion fixed income portfolio. In 2022, Fairfax is on track to earn $830 million in interest income = 2.3% yield on $36.3 billion fixed income portfolio. This will be a record amount of interest income for Fairfax; the previous record was $826 million achieved in 2019 = yield of 3.1% on a fixed income portfolio of $26.4 billion.

 

When it reported Q2 results, Fairfax said the then run-rate for interest and dividend income was $950 million. When it reported Q3 results, Fairfax said the current run-rate for interest and dividend income is $1.2 billion. This is a significant increase of $250 million in just 3 months. Of the $1.2 billion total, about $100 million is dividends and $1.1 billion is interest income - after estimated expenses of about $35 million. The $1.1 billion in interest income = 3.0% yield on $36.3 billion fixed income portfolio. So at the end of Q3 Fairfax was tracking to a 3% yield on its fixed income portfolio which is double what it was in 2021.

 

Of interest, Fairfax confirmed with Q3 results that they are starting to extend the duration of their fixed income portfolio. At the end of Q2 it was 1.2 years. At the end of Q3 it was 1.6 years. Fairfax said they were buying primarily 3 year US treasuries in Q3.

 

For 2023 my current estimate is Fairfax will earn $1.37 billion in interest income = 3.7% yield on $37 billion fixed income portfolio. Current expectations are for the Fed Funds rate to get close to 5.25% in Q1, 2023. If this happens my 3.7% estimate for Fairfax for 2023 will be way low.  

—————

Interest & dividends = interest income + dividends - investment expenses.

 

 

 

 

Edited November 8, 2022 by Viking

[Parsad]

3 hours ago, Xerxes said:

Was that a bet on Fairfax that he made, or a beta bet on central bank intervention producing results and using FFH as a vehicle to capture that since he knows it best and controls it. 
 

To me that was a beta bet for him and those of us who added in 2020, but to bet in 2022-23 on Fairfax that would be a true alpha bet on Fairfax’s unique attributes. 
 

 

 

 

I think it was both.  He knew how his company was situated, and he knew that a ton of money would float into the system.

 

Cheers!

[kab60]

10 hours ago, Parsad said:

 

I fully agree with you.  My methodology and assumptions is my "margin of safety".  It's kept me from being one of those Fairfax investors complaining about their lack of consistency and how my returns suck compared to Berkshire, Markel and the S&P 500 because I've held the stock for 20 years.  I've made money (lots) every time I've bought Fairfax and each time I've gone into the stock in a huge way...2003 (90% of my portfolio)...2007 (60% of my portfolio)...March 2020 (60% of my portfolio). 

 

I've never looked backwards or historically at Fairfax when buying it...that was to give you some measure of value.  My bets were always when I thought they were positioned well for the future and were cheap on a price to book basis.  I'm just saying that investors should look historically to develop their margin of safety, and then bet on the business based on how they will do going forward...but always keep that margin of safety as your measuring stick.  It will protect your portfolio! 

 

One other note.  Have any of you seen Prem put another $150M of his personal money into the stock lately?  No, because he knew it was stupid cheap back then.  That $150M will be $300M very soon!  Bet big, bet boldly when you know things are dirt cheap!  Cheers!

 

I think the setup a couple of weeks ago was better than 2020. Thanks everyone and especially Viking for keeping us up to date. Sure it was cheap in 2020, but most stuff was dirt cheap back then. You could buy Berkshire at $175 for a long time - even after the market had rallied - which then went on to more than double in < 2 years (and 'enterprising investors' could've bought LEAPs on BRK...). Fairfax was clearly cheap, but it had been cheap for a long time, and it wasn't clear it would be 'working'. Since then developments have been very positive, and they're looking even better in the years to come. I've followed for years but finally 'like the stock'.

 

There's a lot of stuff right now that seems cheap, but I think Fairfax has some pretty unique attributes. While I like the absolute risk/reward, I also like it from a portfolio perspective. While insurance is cyclical (soft/hard markets), it's not affected by the typical business cycle and could stay strong going into a recession. And then you have a ton of rate sensitivity, but unlike the banks you don't have to worry about a loan book, which typically means bank stocks 'doesn't work' in a downturn as investors start to fret about losses despite NIM climbing up (and it's nice to have some stock moving up while the market moves down). I'm looking for other rates plays, but Fairfax is the one I found with least downside. Not least as I prefer not losing my shirt even if rates fall.

Edited November 8, 2022 by kab60

[UK]

1 hour ago, kab60 said:

There's a lot of stuff right now that seems cheap, but I think Fairfax has some pretty unique attributes. While I like the absolute risk/reward, I also like it from a portfolio perspective. While insurance is cyclical (soft/hard markets), it's not affected by the typical business cycle and could stay strong going into a recession. And then you have a ton of rate sensitivity, but unlike the banks you don't have to worry about a loan book, which typically means bank stocks 'doesn't work' in a downturn as investors start to fret about losses despite NIM climbing up (and it's nice to have some stock moving up while the market moves down). I'm looking for other rates plays, but Fairfax is the one I found with least downside. Not least as I prefer not losing my shirt even if rates fall.

 

These a great points! I also feel similar re FFH vs banks. FFH is as cheap as banks, provides same or better rate upside (banks will not be able to fix much higher rates for next 5-7-10 years as FFH maybe could?) while possible risks are smaller or different. Does anyone has good idea on how FFH could position their bond portfolio in the nearest future? Is it possible for them to go for much longer duration at some point in the future? Have they said anything about this or it will be totaly opportunistic?

[kab60]

1 minute ago, UK said:

 

These a great points! I also feel similar re FFH vs banks. FFH is as cheap as banks, provides same or better rate upside (banks will not be able to fix much higher rates for next 5-7-10 years as FFH maybe could?) while possible risks are smaller or different. Does anyone has good idea on how FFH could position their bond portfolio in the nearest future? Is it possible for them to go for much longer duration at some point in the future? Have they said anything about this or it will be totaly opportunistic?

I don't think you're getting paid much to take duration up, so I expect duration will increase but still be quiet low. The 'risk' is we hit a hard recession and rates fall, in which case it would've been better to lock in more duration at higher yields. Others are much more knowledgeable, but even though rates have moved violently higher it was off a very low level, so I don't see Fairfax reaching for duration. In other words I expect Fairfax to still be quiet sensitive to ST rates as we go forward.

 

 

[Dazel]

 

Fairfax is positioned perfectly. They will continue to buy corporates and short term 1-5 year bonds….recession will fully hit…they will sell some  short term bonds for profit-capital and buy long term bonds  (barbell). It’s Brian Bradstreet’s time again.
 

It’s the play book. They were one of the only ones on the planet to have the patience to have cash for this move…

 

Prem and the Fairfax team have done a wonderful job and are getting rewarded in a hard market it does not get any better than that

 

congratulations!!! 
 

“You make all your money in bear markets, you just don’t realize it at that time.”

 

Shelby Davis

 

Dazel.

[UK]

Also: https://www.wsj.com/articles/insurers-are-facing-a-steep-rise-in-reinsurance-rates-11667858056?mod=hp_lista_pos2

 

Insurers are in the middle of negotiations with reinsurers, which are trying to boost rates by 10% to 30%. Nearly two-thirds of U.S. property-catastrophe coverage renews each Jan. 1, including for many large diversified U.S. and European insurers.

 

Allstate Chief Executive Thomas Wilson said the price increases being sought by reinsurers are due to their recent losses, worries about climate change and the dollar’s recent strengthening, which hurts some reinsurers because they sell coverage in U.S. dollars yet hold their capital in another currency.

 

“The combination of those three things will make for a really tight reinsurance market,” Mr. Wilson said. “It seems likely to me that the price will go up next year.” Allstate won’t face the hit all at once because its reinsurance program staggers renewals over three years, he said.

 

Rapidly rising interest rates are also hurting reinsurers. Higher rates reduce the value of the bonds they hold. If the companies face payouts, for example from a quick succession of major hurricanes, they might have to sell some of their bonds at a loss. The inflation being experienced by carriers is driving up reinsurance prices, too. 

With so many issues stacked up, “this is really the most challenging renewal year probably since Katrina,” said David Flandro, head of analytics of Howden Group, a London-based broker. In the January 2022 renewal period, year-over-year property-catastrophe reinsurance price increases worldwide came in at 9%, according to Howden data. 

 

Reinsurers haven’t been shy about the price increases they anticipate. Swiss Re’s Group Chief Financial Officer John Dacey said in an Oct. 28 earnings call that “prices will not show some sort of an evolutionary adjustment, but rather a fairly radical adjustment up.”

 

Edited November 8, 2022 by UK

[Luke]

Why is Fairfax so much preferred over Markel here?

 

Feel like Markel offers similiar attributes with even Buffett buying the stock lately...

 

I own Markel too and wondered why i should buy Fairfax if i can buy BRK or Markel as a smaller top notch insurer.

 

 

[UK]

19 minutes ago, Luca said:

Why is Fairfax so much preferred over Markel here?

 

Feel like Markel offers similiar attributes with even Buffett buying the stock lately...

 

I own Markel too and wondered why i should buy Fairfax if i can buy BRK or Markel as a smaller top notch insurer.

 

 

 

 

 

And, give or take, but they are still some 30 per cent cheaper.

[Crip1]

1 hour ago, Luca said:

Why is Fairfax so much preferred over Markel here?

 

Feel like Markel offers similiar attributes with even Buffett buying the stock lately...

 

I own Markel too and wondered why i should buy Fairfax if i can buy BRK or Markel as a smaller top notch insurer.

 

 

I own all three, and each of them are in my top-5 holdings. FFH is selling at a much deeper discount to BV than the other two which makes it a more compelling buy, all things being equal. In reality, though, is that all things are not equal with the following being among the inequalities. 

•    FFH has historically more big-bets compared to MKL/BRK such as MBS shorts in the aughts and equity hedges a decade later. Markets prefer consistency.
•    The communication from FFH, IMHO, is not on par with MKL/FFH. Prem tends to be a cheerleader for his company as opposed to Buffett who willingly acknowledges his mistakes and downplays his accomplishments. Markets like candor and generally don’t like cheerleading.
•    FFH’s longevity of disciplined and profitable underwriting is not on par with the other two. Markets like demonstratable performance.

 

It comes down to this…if you believe that FFH’s future business performance (underwriting and capital allocation) is going to be close to the last 5 years as opposed to the preceding 15 or so (excluding the MBS bet) then FFH is the better investment, especially considering that BRK has gotten so enormous that market outperformance is very difficult. 
FWIW, I currently have a larger position in FFH than the other two.

-Crip
 

[Viking]

Who is the big buyer of FFH shares right now? Share volume is very high in both Canadian and US markets. And this, of course, is spiking the stock price as Fairfax is usually pretty thinly traded. One buyer could be Fairfax. Perhaps we see them take out a material number of shares over the next 7 weeks via the NCIB. If so, the shares could keep running higher into year end.

—————

Fairfax will be paying a US$10/share dividend in January. Something that is typically supportive of the share price.

—————

One of Fairfax’s largest investments is the 1.95 million shares of Fairfax it holds via the TRS. FFH shares were US$457 on Sept 30. Today they are $550. That is a $180 million mark to market gain in 5 weeks (shares are up 20%). I like the TRS position… it definitely motivates FFH management to want a higher stock price and i like that (given FFH is my largest position). 

Edited November 8, 2022 by Viking

[SafetyinNumbers]

1 hour ago, Viking said:

Who is the big buyer of FFH shares right now? Share volume is very high in both Canadian and US markets. And this, of course, is spiking the stock price as Fairfax is usually pretty thinly traded. One buyer could be Fairfax. Perhaps we see them take out a material number of shares over the next 7 weeks via the NCIB. If so, the shares could keep running higher into year end.

—————

Fairfax will be paying a US$10/share dividend in January. Something that is typically supportive of the share price.

—————

One of Fairfax’s largest investments is the 1.95 million shares of Fairfax it holds via the TRS. FFH shares were US$457 on Sept 30. Today they are $550. That is a $180 million mark to market gain in 5 weeks (shares are up 20%). I like the TRS position… it definitely motivates FFH management to want a higher stock price and i like that (given FFH is my largest position). 

I received two notes from brokers this week pushing FFH based on technical analysis as it’s hitting new 52 week-highs. One also pointed out that Dec and Jan are seasonally strong months vs the index for FFH. My guess is the technical confirmation and seasonality allowed some PMs to finally buy FFH again especially after the quarter they just put out that demonstrated the earnings power that you have so eloquently shared with us on this board. The next resistance area are the all time highs which were tested in 2016 and 2018. I think most technicians would say it will probably pause there for a bit but it could really run if/when it breaks out to all time highs.

Edited November 8, 2022 by SafetyinNumbers

[Parsad]

1 hour ago, Viking said:

Who is the big buyer of FFH shares right now? Share volume is very high in both Canadian and US markets. And this, of course, is spiking the stock price as Fairfax is usually pretty thinly traded. One buyer could be Fairfax. Perhaps we see them take out a material number of shares over the next 7 weeks via the NCIB. If so, the shares could keep running higher into year end.

—————

Fairfax will be paying a US$10/share dividend in January. Something that is typically supportive of the share price.

—————

One of Fairfax’s largest investments is the 1.95 million shares of Fairfax it holds via the TRS. FFH shares were US$457 on Sept 30. Today they are $550. That is a $180 million mark to market gain in 5 weeks (shares are up 20%). I like the TRS position… it definitely motivates FFH management to want a higher stock price and i like that (given FFH is my largest position). 

 

Whenever we start to get a ton of positive chatter around the stock and future expected performance, we start to see more buyers because more people feel confident or become aware of what is happening at Fairfax.  I would imagine those investors combined with some buy backs is really pushing up the stock.  Also insurance investors see that many insurers have lost tremendous book value in the last 3 quarters...they are probably moving some assets from other insurers into Fairfax.  We all knew it was coming...it is slowly getting here now.  Cheers!

[gfp]

 

 

[petec]

13 hours ago, Dazel said:

They will continue to buy corporates and short term 1-5 year bonds….recession will fully hit…they will sell some  short term bonds for profit-capital and buy long term bonds

 

Why would they buy long term bonds in a recession? Wouldn't rates be likely to come down in a recession, and money flee to quality? I could see them going long duration before a recession - which would be a pure macro bet of the sort that the board has mood swings about - but not during. What am I missing?

[petec]

On 11/7/2022 at 7:23 PM, Viking said:

What has driven this significant growth? For the first 3 years acquisitions drove a large part of the growth: Brit (2015), International (2016) and Allied World (2017). For the past 5 years (2018-2022) the growth has been organic and driven by the hard market of the past 3 years. Looking back, Fairfax timed their large insurance acquisitions perfectly (right before the hard market set in).

 

This is a key point! Turns out the wasted years weren't entirely wasted after all.

 

Viking I'd like to add my thanks to the chorus. I've been directionally aware of everything you're discussing for years, but it is incredibly useful to have someone summarise the numbers. Heroic work!

 

Question for the board: how sticky are hard market premiums? In other words, when the soft market comes how much should we expect premiums to contract? Prem says they're sticky - this is a key reason for the focus on growth over buyback at the moment - but I don't really understand why they would be. Obviously this matters when we think about the sustainability of earnings.

[Xerxes]

9 hours ago, petec said:

 

Why would they buy long term bonds in a recession? Wouldn't rates be likely to come down in a recession, and money flee to quality? I could see them going long duration before a recession - which would be a pure macro bet of the sort that the board has mood swings about - but not during. What am I missing?

I was also intrigued by @Dazel statement. 
 

This is how I played it in my head:  

 

recession hits, yields crash, T-bill gain value 

At some point the yield curve moves from flat to an steepening one in the middle of recession, as it sees the economy recovery, with the back end yield shooting up, the 10-year treasury becomes a sought to asset. 

[Thrifty3000]

9 hours ago, petec said:

 

This is a key point! Turns out the wasted years weren't entirely wasted after all.

 

Viking I'd like to add my thanks to the chorus. I've been directionally aware of everything you're discussing for years, but it is incredibly useful to have someone summarise the numbers. Heroic work!

 

Question for the board: how sticky are hard market premiums? In other words, when the soft market comes how much should we expect premiums to contract? Prem says they're sticky - this is a key reason for the focus on growth over buyback at the moment - but I don't really understand why they would be. Obviously this matters when we think about the sustainability of earnings.

I’ve been curious about this too. I’ve heard Prem talk about a relationship between hard/soft markets and book value. How they’ll ramp premiums to around 1.5x book value during hard markets. Seems they’ve gone higher than that in this one.

 

My assumption is during soft markets premiums will drop back down to somewhere around book value depending on how soft.

 

So, conservatively modeling a full cycle run rate in the neighborhood of maybe 1 or 1.2 times book might be appropriate. After that it’s a matter of growth rate over time.

[glider3834]

great article on drivers behind very hard market in reinsurance

https://www.insurancejournal.com/app/uploads/2022/11/Schroders-market-correx-article.pdf

 

Along with tighter terms, significant reinsurance rate increases are being suggested

 

"Hurricane Ian affected the entire industry," Hagedorn said, adding that reinsurers were estimating global property reinsurance rate rises of 15%-40% next year.

https://www.reuters.com/business/finance/reinsurance-hedge-fund-tangency-capital-raises-200-mln-2022-11-11/

 

 

https://www.wsj.com/articles/insurers-are-facing-a-steep-rise-in-reinsurance-rates-11667858056

 

In the run-up to the key 1 January reinsurance renewal date, Cox cited speculation that reinsurance rates could increase “from the mid-20s to the 50s and higher” and include a “significant change in attachment points”.

 

https://www.insuranceinsider.com/article/2aveq15rr2b5bo0dv4glc/london-market-section/properly-priced-reinsurance-positive-for-insurance-industry-beazleys-cox

 

Edited November 14, 2022 by glider3834

[Viking]

It certainly has been encouraging to see the spike in Fairfax’s share price over the past month. Fairfax closed today at $563 which is near a new 52 week high. In the coming month or two it looks poised to take out its all time high of around US$590 in Sept 2016.
 

The interesting thing is Fairfax as a company is much, much better positioned today than 2016 when you look at all important metrics.

- net premiums written

- underwriting profit (total)

- interest and dividend income (total)

- share of profit of associates

- quality of equity holdings (taken as a whole)

- float

Yes, total debt is quite a bit higher. I think share count is a little higher today than 2016.

 

I don’t have the exact numbers on me (i am not at home as i write this), but Fairfax is probably worth 2X what it was worth in 2016. Was Fairfax overvalued at its high in 2016? Looking back with hindsight, clearly yes. I also think Fairfax continues to be undervalued. How much is it undervalued? Given we are approaching year end, now would be good to do an updated earnings forecast for 2023. My guess is US $100/share is a good baseline.

————-

Q4 earnings should be very good = $60-$70/share

- 20% top line growth

- underwriting income = +$300 million (94CR, probably lower)

- interest and div income = +$330 million (incl Stelco special)

- positive mark to market gains from both stocks and bonds

- $40/share after tax gain from pet insurance sale

- 1 or perhaps 2% lower share count

- lots of great tailwinds

 

[SafetyinNumbers]

RBC is at $95.75 for 2023 and $100 for 2024 but consensus is only $88 and $86 so some decent upside in consensus to come which might help with more quant buying.

[Viking]

Here is another stab at 2023 earnings for Fairfax. Would love to hear what others think. I am at about US$110/share for 2023 (see below for my rough math). With Fairfax currently trading at $560, forward PE ratio = 5. My guess is YE 2023 BV will be around $750 = forward P/BV = 0.75.  

- underwriting: 95CR

- interest and dividend income: 3.7% portfolio yield

- share of profit of associated: $1 billion. I do need to spend more time on this bucket. if Fairfax can consistently earn $1 billion per year moving forward that will be another game changer. Compare 2022 to 2018, 2019 and 2020 (see my table below). You can really see the improvement in earnings from equity holdings, especially Eurobank. 

- operating income from non-insurance: now includes Grivalia Hospitality and 84% owned Recipe. This bucket could start to generate a consistent +$150 to $200 million per year.

- net gains on investments: estimate of 5% on $15 billion = $750 million. This assumes no mark to market gains on bonds. Just mark to market gains on equities plus any realized gains. This assumes Fairfax will monetize one or more positions in 2023; perhaps EXCO? 

 

The really really nice thing with Fairfax is the improvement in the business fundamentals is outpacing the increase in the share price. We could see the 'trifecta' in 2023:

1.) growing earnings - with the increase driven by operating earnings

2.) lower share count

3.) higher multiple - as Mr Market gets more comfortable with the earnings story of 'new Fairfax'

 

When the trifecta happens at the same time it is not crazy to see the stock price increase +20% each year for a couple of years. For example, If my estimate for 2023 is close, Fairfax's BV will be around US$750 at YE 2023. Given the increase in operating earnings, a multiple of 1X BV would be reasonable. From $560 today to $750 YE 2023 = 33% increase over 13 months. One can dream  

----------

The biggest risks?

1.) a higher than normal year for catastrophes. 

2.) a severe global recession

3.) a bear market in stocks (tied to 2.)

4.) asset write downs (if we get 2.) and 3.) above): Farmers Edge got written down in 2022. I wonder if we get a write down on Recipe in Q4. 

----------

The biggest opportunities?

1.) share buybacks: Fairfax could be aggressive with NCIB... taking out 1% or even 2% of shares each and every quarter moving forward. With high operating income, they now should be generating the cash on a consistent basis.

2.) Fairfax could pull another rabbit out of its hat - like when it sold pet insurance or Resolute Forest Products or runoff or First Capital...

3.) Digit could IPO at $3.5 billion

4.) India / Anchorage... sounds like something is going on. 

 

Edit: my old spreadsheet had a bunch of errors so I replaced it with a more accurate version (Nov 23)

 

 

Edited November 24, 2022 by Viking

[StevieV]

5 hours ago, Viking said:

When the trifecta happens at the same time it is not crazy to see the stock price increase +20% each year for a couple of years. For example, If my estimate for 2023 is close, Fairfax's BV will be around US$750 at YE 2023.

 

If Fairfax actually earns $100+/share in 2023 and thereafter, it's hard to see how the share price won't do well over time.  The share price has been in the penalty box for a while.  I don't think that's been totally unjustified.  It can take a while to change perceptions, but you can see it happening now with Fairfax finally outperforming this YTD.

[newtovalue]

One concern I have with using book value to look at FFH is the goodwill on the balance sheet.

 

currently goodwill is $5.8 billion or $249 usd per share. If you back this out - Fairfax is trading at price to book of around 1.5x.

 

now I still think it’s super cheap based on earnings power and float - but using book value as a measure doesn’t align with BRK or MKL because they have much more tangible book values.

 

thoughts ?