Fairfax 2022

[petec]

On 2/7/2022 at 4:46 PM, bluedevil said:

think on the duration of the bond investing, it is not really about lumpiness.  I think it boils down to whether you think you can beat the market on a very macro topic - the future of interest rates. 

 

I'm not entirely sure this is true.

 

I think it's about assessing whether you are being paid to take duration risk. 

 

In other words it is about analysing the spread between short term and long term debt, and deciding whether that spread adequately compensates you for the risk of capital loss if rates rise.

 

You can forecast interest rates to do this, but you don't have to, because you can just do it by looking at how much you'd lose if the bet went wrong vs. how much you'd make if it went right, and deciding whether you like the payoff.

 

Not sure I am making sense here but to put it another way: if 2y rates = 30y rates it might be very stupid of Markel to duration-match a 30-year liability. They'd be taking a totally un-necessary risk.

[Crip1]

2 hours ago, petec said:

 

I'm not entirely sure this is true.

 

I think it's about assessing whether you are being paid to take duration risk. 

 

In other words it is about analysing the spread between short term and long term debt, and deciding whether that spread adequately compensates you for the risk of capital loss if rates rise.

 

You can forecast interest rates to do this, but you don't have to, because you can just do it by looking at how much you'd lose if the bet went wrong vs. how much you'd make if it went right, and deciding whether you like the payoff.

 

Not sure I am making sense here but to put it another way: if 2y rates = 30y rates it might be very stupid of Markel to duration-match a 30-year liability. They'd be taking a totally un-necessary risk.

I was thinking along similar lines that there is a risk-reward analysis at play. Is it worth some additional yield in the short term with to open one’s self up to capital loss in the intermediate-long term? If the difference is 300 basis points per year, maybe. But if the difference is 50 bps per year the reward is substantively less attractive. 

 

-Crip

[Viking]

3 hours ago, Crip1 said:

I was thinking along similar lines that there is a risk-reward analysis at play. Is it worth some additional yield in the short term with to open one’s self up to capital loss in the intermediate-long term? If the difference is 300 basis points per year, maybe. But if the difference is 50 bps per year the reward is substantively less attractive. 

 

-Crip

Now i know this is impossible. But what happens IF the 10 year US treasury goes to 5% in the next 2 years. Let’s pretend the inflation genie is out of the bottle. Lots of insurance companies will be booking massive losses (mark to market losses on their bond holdings) and taking big hits to BV. With losses for some possibly in the billion $ range. 
 

Managing a bond portfolio (and duration) has got to be driving people crazy. The inflation tail risk is rising. The deflation tail risk is still there. What to do?

Edited February 9, 2022 by Viking

[Viking]

With Fairfax earnings being released after markets close Thursday what are the things people are watching most closely? Here are a couple of things for me:

1.) does net written premiums growth stay close to 20%?

- hard market: still alive and well as we enter 2022?
2.) CR: are we able to get below 96? 
- Northbridge: impact of BC flooding?

- Brit: and more covid charges? Ki? New CEO…

- reserving? I think Q4 is when annual reserve review is done.

3.) interest and dividend income: do we see bottoming?

- how does total compare to Q3?

4.) realized gains? Stock holdings were up nicely in Q4.

- do we see impairment charge for Farmers Edge? Altas Mara? Others?

- any change to FFH TRS position size?

- Digit update? Did Indian government give approval? Or is this still pending?

- were any equity positions sold?

5.) runoff: do we see another big asbestos related addition to reserves?

- this business is now included with Eurolife…

6.) sale of 10% of Odyssey: how does this flow through financial statements?

- does transaction impact value Odyssey is carried at in BV?

7.) YE BV/share: how much over US$600? This is the big one  

Edited February 10, 2022 by Viking

[petec]

2 hours ago, Viking said:

YE BV/share: how much over US$600? This is the big one

 

Including unrealised gains. Speaking of which, nice to see Eurobank breaking out to what must be decade highs.

[glider3834]

2 hours ago, Viking said:

With Fairfax earnings being released after markets close Thursday what are the things people are watching most closely? Here are a couple of things for me:

1.) does net written premiums growth stay close to 20%?

- hard market: still alive and well as we enter 2022?
2.) CR: are we able to get below 96? 
- Northbridge: impact of BC flooding?

- Brit: and more covid charges? Ki? New CEO…

- reserving? I think Q4 is when annual reserve review is done.

3.) interest and dividend income: do we see bottoming?

- how does total compare to Q3?

4.) realized gains? Stock holdings were up nicely in Q4.

- do we see impairment charge for Farmers Edge? Altas Mara? Others?

- any change to FFH TRS position size?

- Digit update? Did Indian government give approval? Or is this still pending?

- were any equity positions sold?

5.) runoff: do we see another big asbestos related addition to reserves?

- this business is now included with Eurolife…

6.) sale of 10% of Odyssey: how does this flow through financial statements?

- does transaction impact value Odyssey is carried at in BV?

7.) YE BV/share: how much over US$600? This is the big one  

good summary Viking

 

I estimate increase in fair/market value for Exco could be around 40% for 2021.

 

Chou Associates Funds is carrying their Exco stake at

$13.41 mil at 31 Dec-20 (actual reported)

$17.3 mil at 31 Aug-21 (my estimate based on Exco position 8.7%  & fund NAV 198.8 mil)

$18.76 mil at 31 Dec-21 (my estimate based on Exco position 11.4% & fund NAV $164.6 mil)

http://choufunds.com/pdf/Asso 2021 Q4 Holdings.pdf

 

Assuming Chou Funds didn't change their shareholding during 2021, the increase in fair value is 40%

 

Now its likely that Fairfax has already reflected most of this Exco increase in fair value in their 3Q 2021 report (Excess of FV over CV for non-insurance subs number).

 

There was no breakdown for Exco in 3Q in there so its hard to be certain. 

 

 

 

 

 

 

 

Edited February 10, 2022 by glider3834

[glider3834]

21 minutes ago, petec said:

 

Including unrealised gains. Speaking of which, nice to see Eurobank breaking out to what must be decade highs.

https://www.businessdaily.gr/agores/57633_eurobank-systasi-agoras-tis-metohis-apo-ti-13d-research-strategy

actually I think they meant to say 2022 ROTE 10% - which is where Eurobank mgmt were guiding last quarter.

 

as reported by HSBC, "the share price of Eurobank has doubled on an annual basis and has 0.59x P / TBV and is close to the highs of the last five years. However, the valuation still does not reflect the strong 10% increase in the 2022 ROTE and the possibility of starting a dividend in 2023 . Although the bank is very similar to its EU counterparts in terms of capital and profitability, its valuation still has a discount of about 20% on P / TBV and about 40% on a P / E basis."Eurobank's valuation premium against its Greek competitors has recently widened, but we believe it was worth it, given its superior profitability and the possibility of distributing dividends."

 

 

[Viking]

25 minutes ago, glider3834 said:

good summary Viking

 

I estimate increase in fair/market value for Exco could be around 40% for 2021.

 

Chou Associates Funds is carrying their Exco stake at

$13.41 mil at 31 Dec-20 (actual reported)

$17.3 mil at 31 Aug-21 (my estimate based on Exco position 8.7%  & fund NAV 198.8 mil)

$18.76 mil at 31 Dec-21 (my estimate based on Exco position 11.4% & fund NAV $164.6 mil)

http://choufunds.com/pdf/Asso 2021 Q4 Holdings.pdf

 

Assuming Chou Funds didn't change their shareholding during 2021, the increase in fair value is 40%

 

Now its likely that Fairfax has already reflected most of this Exco increase in fair value in their 3Q 2021 report (Excess of FV over CV for non-insurance subs number).

 

There was no breakdown for Exco in 3Q in there so its hard to be certain. 

@glider3834 thanks for the colour on EXCO. My guess is we will have to wait until the AR is published to get a more detailed update on the individual positions. 
—————

Sounds like there is some drama at Quess. It is down about 9% today.

- https://www.moneycontrol.com/news/business/exclusive-quess-corp-group-ceo-suraj-moraje-likely-to-step-down-8068251.html

[Crip1]

7 hours ago, Viking said:

With Fairfax earnings being released after markets close Thursday what are the things people are watching most closely? Here are a couple of things for me:

1.) does net written premiums growth stay close to 20%?

- hard market: still alive and well as we enter 2022?
2.) CR: are we able to get below 96? 
- Northbridge: impact of BC flooding?

- Brit: and more covid charges? Ki? New CEO…

- reserving? I think Q4 is when annual reserve review is done.

3.) interest and dividend income: do we see bottoming?

- how does total compare to Q3?

4.) realized gains? Stock holdings were up nicely in Q4.

- do we see impairment charge for Farmers Edge? Altas Mara? Others?

- any change to FFH TRS position size?

- Digit update? Did Indian government give approval? Or is this still pending?

- were any equity positions sold?

5.) runoff: do we see another big asbestos related addition to reserves?

- this business is now included with Eurolife…

6.) sale of 10% of Odyssey: how does this flow through financial statements?

- does transaction impact value Odyssey is carried at in BV?

7.) YE BV/share: how much over US$600? This is the big one  

Inverting the question. The items above represent mainly good news but I think the market is focused more on bad news for Fairfax (Additional reserving, impairment charges, unexpected insurance losses, etc). To the extent bad news can be eliminated or minimized the closer to intrinsic value the market will value Fairfax without the current discount.

 

-Crip

[Viking]

2 hours ago, Crip1 said:

Inverting the question. The items above represent mainly good news but I think the market is focused more on bad news for Fairfax (Additional reserving, impairment charges, unexpected insurance losses, etc). To the extent bad news can be eliminated or minimized the closer to intrinsic value the market will value Fairfax without the current discount.

 

-Crip

What will it take for Fairfax to close the valuation discount? No surprises will help. But in the short term my guess is delivering improving operating earnings. So the CR is key today. And if Fairfax can communicate a path to increasing interest and dividend income as the year progresses (via extending duration of the bond portfolio) then we MIGHT see the valuation discount shrink. The analyst community seems to be wholly focussed on operating earnings. My read is they view any oversized investment gains as not sustainable. 
 

Now Fairfax is positioned very well today with its investment portfolio. Very low duration with bonds. Heavily tilted to cyclicals on stocks. Both are in the sweet spot. At least right now. 
 

BV is in their control; as long as this continues to grow i will be happy. Multiple expansion will be a bonus. 

[glider3834]

10 hours ago, Viking said:

@glider3834 thanks for the colour on EXCO. My guess is we will have to wait until the AR is published to get a more detailed update on the individual positions. 
—————

Sounds like there is some drama at Quess. It is down about 9% today.

- https://www.moneycontrol.com/news/business/exclusive-quess-corp-group-ceo-suraj-moraje-likely-to-step-down-8068251.html

strange - looks like CEO has left & replaced by COO- will have to wait & see the reasons - usually not a good sign but I don't think its related to their operating performance - posted record quarterly result in Dec-21 qtr in terms of revenues, EBITDA,PBT

https://www.quesscorp.com/investor/dist/images/pdf/Announcements/Press-Release-Q3FY22.pdf

 

 

[Candyman1]

https://finance.yahoo.com/news/fairfax-financial-holdings-limited-financial-220200619.html

 

 

[Thrifty3000]

Holy eff. A work of art. 

[Crip1]

Seeking Alpha may not have proofread the headline terribly well:

 

FRFHF: Fairfax Financial GAAP EPS of $122.25 beats by $1.78, revenue of $26.47M misses by $25.22B

 

I mean, nice earnings number but it's kind of a miss to fall $25.22B short on revenue.

 

-Crip

 

[cwericb]

8 minutes ago, Crip1 said:

Seeking Alpha may not have proofread the headline terribly well:

 

FRFHF: Fairfax Financial GAAP EPS of $122.25 beats by $1.78, revenue of $26.47M misses by $25.22B

 

I mean, nice earnings number but it's kind of a miss to fall $25.22B short on revenue.

 

-Crip

 

Haha I saw that and was thinking WTF? What, how, am I seeing things? Now that I have my breath back, I wonder how embarrassed SA will be over this? Perhaps this headline will produce a great buying opportunity  tomorrow AM? Wishful thinking I'm sure

[bluedevil]

Pretty amazing that GWP increased by $5 billion in 2021.

Fairfax Financial paid $4.9 billion for Allied World, at a time when it had GWP of $3 billion per year.  

[nwoodman]

 

1. A decent increase in book value per share over the quarter $US561.88 ->$US630.60 +12%.  Repurchasing shares 0.8x's BV certainly helps

2.  Interesting to see that Digit appprovals are still a work in progress.  Imagine when it gets done it would be worthy of a press release

3. Hard to beleive that we are still sitting at around 0.8x's BV and possibly even less now with the gains in ATCO and Eurobank

 

[Parsad]

Great quarter and year for Fairfax!  Everything looks positioned for a successful 2022 as well...hard market continues, portfolio is well-positioned, a number of investments are finally moving (Eurobank, Atco, etc), Digit IPO should bode well, interest income will be higher while debt is lower, TRS should start looking really good as stock approaches $700 CDN, and balance sheet is solid!

 

Should also be noted that Peter Clarke has been appointed as President of Fairfax.  Great choice!  Cheers!

 

https://www.fairfax.ca/news/press-releases/press-release-details/2022/Fairfax-Financial-Holdings-Limited-Executive-Announcement/default.aspx

[StubbleJumper]

1) Holy Christ, Odyssey is on fire.  We've seen this in the past when reinsurance pricing became attractive that ORH's book exploded in a spectacular fashion.  We didn't see it so much in 2020, presumably due to underwriting discipline.  If the Q4 net written numbers and the complete year 2021 numbers mean anything for this year, look out!  Odyssey is particularly well capitalised and there's plenty of underwriting capacity.

 

2) Where is the underwriting shit-show?  Seriously, there is usually one insurance sub that has a crap year, but there isn't really one this year.  Are the subs finally firing on all cylinders?

 

3) FFH will be rolling $25 billion of cash and short term investments during 2022.  T-bill and ST treasury rates are a good 50 bps higher than a year ago, and that seems to be growing by the week.  Will we see an extra $100m in interest income during 2022?

 

4) Still holding the TRS on FFH shares.  It's working favourably for shareholders at the moment, but I'm not sure that I get the strategy.

 

5) Did they take the FF India performance fee in units?  The units are ridiculously valued at 0.6x book, so I hope they took that $85m in discounted units!

 

6) Looks like de-leveraging has advanced quite nicely by cranking up the denominator of the debt-ratios.  I hope management doesn't forget lessons learned in 2020 (I had hoped they wouldn't forget about 2003).

 

 

SJ

[TwoCitiesCapital]

25 minutes ago, nwoodman said:

 

1. A decent increase in book value per share over the quarter $US561.88 ->$US630.60 +12%.  Repurchasing shares 0.8x's BV certainly helps

2.  Interesting to see that Digit appprovals are still a work in progress.  Imagine when it gets done it would be worthy of a press release

3. Hard to beleive that we are still sitting at around 0.8x's BV and possibly even less now with the gains in ATCO and Eurobank

 

 

If we take the $630/share as reported, write it up for the $400 million to be booked on Digit, the $360+ million on associates,  and write Fairfax India up to it's NAV, we're sitting at something closer to $800/share or 0.65x adjusted book. 

Edited February 10, 2022 by TwoCitiesCapital

[Parsad]

6 minutes ago, TwoCitiesCapital said:

 

If we take the $630/share as reported, write it up for the $400 million to be booked on Digit, the $360+ million on associates,  and write Fairfax India up to it's NAV, we're sitting at something closer to $800/share or 0.65x adjusted book. 

 

Hey, but as some say on here...apparently Prem has no clue what he's doing...and investors in FFH are just taking a flyer on it.  Look at its performance over the last 10 years...that means Fairfax is a permanently stunted investment that will never move up, even at 0.6 of book value!  Only a fool would put money into Fairfax!

 

Glad I only put like 60% of my net worth into it when it was at $430 CDN!  After a $220 CDN increase per share, I've reduced it to 40% of my net worth and it is still quite undervalued and growing.  Buy below intrinsic value and sell as it approaches intrinsic value...you can never go wrong!  Cheers!

[returnonmycapital]

18 minutes ago, TwoCitiesCapital said:

 

If we take the $630/share as reported, write it up for the $400 million to be booked on Digit, the $360+ million on associates,  and write Fairfax India up to it's NAV, we're sitting at something closer to $800/share or 0.65x adjusted book. 

I am getting closer to $700 for FMBV (using a 26% tax rate on the difference between FMV and accounting value). 

[lessthaniv]

20 minutes ago, returnonmycapital said:

I am getting closer to $700 for FMBV (using a 26% tax rate on the difference between FMV and accounting value). 

 

$400m US digit + $346m US on associate = $746m US / 23.8m = ~ $31/share US

So adjusted not including (FIH) is about $660US/sh BV or about $800Cdn/sh BV

 

$800cdn * 1.2x = ~$960/sh  

 

Roughly piggy back National's view. 

 

Edited February 10, 2022 by lessthaniv
Adj Scotia to National's

[glider3834]

'At December 31, 2021 the company's insurance and reinsurance companies held $24.9 billion in cash and short-dated investments representing 50.3% of portfolio investments'

 

I think they might have reduced their fixed income portfolio duration even more in Q4 

39% at 31 Dec-20

44% at 30 Sep-21

50% at 31 Dec-21

 

 

 

[MMM20]

Stock should be up 50% tomorrow.