Fairfax 2022

[TwoCitiesCapital]

1 hour ago, returnonmycapital said:

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

 

I did not adjust for taxes because I do not know what they'll be. To some extent, like BIAL, I expect many of the holdings to be decade-long, or more, type investments. So much like Berkshire's forever time frame, not sure taxes are super impactful here. 

 

But ultimately it's $365 million on associates, $400 million on Digit, and something like an additional $3 billion on the carrying value if Fairfax India versus it's NAV. 

Edited February 11, 2022 by TwoCitiesCapital

[Viking]

From my perspective the complete shocker is the Q4 CR of 88 and underwriting profit in Q4 of $471 million. WTF? Full year CR of 95 (it was 97.8 in 2020)?

 

We have been in a hard market for +2 years now. IF WE ARE NOW SEEING THE BENEFITS OF THE HARD MARKET VIA A MUCH IMPROVED CR THAT IS BIG, BIG NEWS.

 

Is it reasonable to model a 94 CR for Fairfax in 2022? If yes, holy shIt batman. Remember written premiums have been growing 20%. Add in a 94 (or better) CR and Fairfax will be generating record underwriting income in 2022.

 

This is the earnings source (along with interest and dividend income) that pretty much all insurance analysts use to value an insurance company (it determines the multiple they use).

-----------

Now lets overlay how the bond portfolio is positioned today (extremely low duration). This should lead in INCREASING interest and dividend income as we move further into 2022 (rising interest rate environment).

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MUCH HIGHER OPERATING INCOME (UNDERWRITING + INTEREST & DIV INCOME) = HIGHER MULTIPLE ON FAIRFAX'S STOCK. 

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Can some explain the "loss portfolio transfers completed at Crum & Forster and Brit in the fourth quarter of 2021". What is this kind of transaction is this and what impact does it have on future results? Why do it?

Edited February 11, 2022 by Viking

[Parsad]

3 minutes ago, Viking said:

From my perspective the complete shocker is the Q4 CR of 88 and underwriting profit in Q4 of $471 million. WTF? Full year CR of 95 (it was 97.8 in 2020)?

 

We have been in a hard market for +2 years now. IF WE ARE NOW SEEING THE BENEFITS OF THE HARD MARKET VIA A MUCH IMPROVED CR THAT IS BIG, BIG NEWS.

 

Is it reasonable to model a 94 CR for Fairfax in 2022? If yes, holy shIt batman. Remember written premiums have been growing 20%. Add in a 94 (or better) CR and Fairfax will be generating record underwriting income.

 

This is the earnings source (along with interest and dividend income) that pretty much all insurance analysts use to value an insurance company.

-----------

Now lets overlay how the bond portfolio is positioned (extremely low duration). This should lead in INCREASING interest and dividend income as we move further into 2022.

------------

MUCH HIGHER OPERATING INCOME (UNDERWRITING + INTEREST & DIV INCOME) = HIGHER MULTIPLE ON FAIRFAX'S STOCK. 

 

From everything I'm seeing, I would not be surprised if they write a full-year CR of 93 or better next year.  Premium prices are rising, costs at the administrative level had to come down due to low interest rates...which forces better underwriting.  But many insurers are going to lose money on the bond side over the next 6-9 months and markets overall are at fair value...this means continued discipline in underwriting and continued tightening on the administrative side.  Cheers!

[Sullivcd]

39 minutes ago, MMM20 said:

I didn’t say it *would* be.

My bet is unch to testing that $521 we hit today. A couple weeks from now should be a different story though. Hopefully I'm wrong and it rips.

[glider3834]

2020 

CR 97.8

 

exclude catastrophe loss 4.7 (-)

exclude covid loss 4.8 (-)

add back net fav develop 3.3 (+) 

 

Underlying CR (excl catastrophe, excl covid, excl net fav develop) 91.6

 

2021

CR  95.0

 

exclude catastrophe loss 7.2 (-)

exclude covid loss 0.3 (-)

add back net fav develop 2.2 (+) 

 

Underlying CR (excl catastrophe, excl covid, excl net fav develop) 89.7

 

If we try & estimate 2022 CR

 

Lets assume they continue the trend & reduce underlying CR down to 88.0 from 89.7.

Lets assume 0.1 CR covid loss (reduced from 0.3 in 2021), 6.5 CR catastrophe loss (at higher end of range from 4.7(2020) to 7.2 (2021)), net fav development 1.0 (reduced from 2.2 in 2021 to 1.0 in 2022)

 

Then you get estimate CR 93.6 for 2022  & would estimate underwriting profit for 2022 = $1.15 billion (est 18 bil net earned premium x (100-93.6)%)

 

so I would agree with you guys  @Parsad & @Viking - I think 93-94 range for CR looks about right for 2022

 

 

 

 

 

 

 

 

 

 

Edited February 11, 2022 by glider3834

[Cigarbutt]

2 hours ago, Viking said:

...

Can some explain the "loss portfolio transfers completed at Crum & Forster and Brit in the fourth quarter of 2021". What is this kind of transaction is this and what impact does it have on future results? Why do it?

Opinion: these look like operating decisions which are not material in the grand scheme of things. It's an exchange of reserves for premiums with a time value component and the buyers of reserves think that they can make a larger profit than the sellers, in this case Fairfax. It's likely tied to older business lines in run-off or semi run-off; FFH likely sells a small profit opportunity but gets a cap on adverse development on already incurred claims. 

These transactions can have small effects on statutory capital but that doesn't look like a primary reason in these specific cases.

These are similar (in substance) to adverse development covers that FFH was fond of (example: the Swiss Re cover (remember those days?)) before finite reinsurance issues surfaced in the early 2000s.

[Viking]

32 minutes ago, Cigarbutt said:

Opinion: these look like operating decisions which are not material in the grand scheme of things. It's an exchange of reserves for premiums with a time value component and the buyers of reserves think that they can make a larger profit than the sellers, in this case Fairfax. It's likely tied to older business lines in run-off or semi run-off; FFH likely sells a small profit opportunity but gets a cap on adverse development on already incurred claims. 

These transactions can have small effects on statutory capital but that doesn't look like a primary reason in these specific cases.

These are similar (in substance) to adverse development covers that FFH was fond of (example: the Swiss Re cover (remember those days?)) before finite reinsurance issues surfaced in the early 2000s.

@Cigarbutt thanks for the lesson… much appreciated. ‘Swiss Re cover’… yes, that brings back some memories.

[petec]

9 hours ago, StubbleJumper said:

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!

 

I don't think they have taken it yet. They've booked it, but it doesn't actually pay out until Dec 2023 (and is subject to adjustment between now and then). And yes from memory the fee is paid in shares unless p/bv is over 2x, in which case FFH have the option of taking cash. I won't have remembered that exactly right but it is something like that. The last performance fee was paid in shares.

[petec]

7 hours ago, TwoCitiesCapital said:

something like an additional $3 billion on the carrying value if Fairfax India versus it's NAV. 

 

Where are you getting that from? It is a larger number than I remember. FIH's entire balance sheet is carried at 3.5bn so 3bn would be a huge excess of fair over carrying, especially if that is just FFH's portion...

[TwoCitiesCapital]

1 hour ago, petec said:

 

Where are you getting that from? It is a larger number than I remember. FIH's entire balance sheet is carried at 3.5bn so 3bn would be a huge excess of fair over carrying, especially if that is just FFH's portion...

 

Currently it's carried at $2 billion with the fair market value being $3.3 billion as of Dec 31.

 

But that fair market value was $12.5/share when NAV was $19.6/share so a big step up from $2 billion carrying value to NAV.  You'd have to write the value up from $2B to 5.25B to reflect the $19.6 price. 

 

But as I think through this, they consolidate Fairfax India, so that $2B is the whole of Fairfax India with an adjustment for minority stakes elsewhere and I didn't reduce by the minority stake in my math above. 

 

So probably closer to $700/share instead of the $800 mentioned above. 

Edited February 11, 2022 by TwoCitiesCapital

[valuesource]

13 hours ago, lessthaniv said:

 

$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. 

 

$660 USDs x 1.2704 (USD/CAD f/x) = $838.46 CAD

[StubbleJumper]

11 hours ago, glider3834 said:

add back net fav develop 3.3 (+) 

 

You should only add back favourable development from previous years if you also subtract favourable development for 2021 that will appear in the future.  The conservative underwriting practices have not likely changed.  The favourable development is likely to continue, but it remains to be seen just how big that cookie jar will be.  It's fine to be conservative in your estimate of that cookie jar, but it'll almost certainly be at least a couple of points, right?

 

 

SJ

[glider3834]

1 hour ago, StubbleJumper said:

 

You should only add back favourable development from previous years if you also subtract favourable development for 2021 that will appear in the future.  The conservative underwriting practices have not likely changed.  The favourable development is likely to continue, but it remains to be seen just how big that cookie jar will be.  It's fine to be conservative in your estimate of that cookie jar, but it'll almost certainly be at least a couple of points, right?

 

 

SJ

yes good point SJ - I just wanted to strip it out so we could compare 2021 & 2020 to see any improvement in underlying CR - but to go back to your point which Prem just made on the conference call they believe their reserving is conservative - so their reported combined ratio probably understates how profitable the underwriting actually is & that is likely to manifest itself in fav develop in future  years. 

[lessthaniv]

1 hour ago, valuesource said:

$660 USDs x 1.2704 (USD/CAD f/x) = $838.46 CAD

Was just a back of the napkin using the high side of its 5 yr range.   

[valuesource]

1 hour ago, lessthaniv said:

Was just a back of the napkin using the high side of its 5 yr range.   

Understood.

[Viking]

Here a couple of take-aways from the Q4 earnings conference call. I tried to focus on stuff i did not see in the news release.

- buying back stock will be a focus in 2022 given how undervalued the shares continue to be. But not at expense of growing subs in hard market or at expense of financial position.

- annual report will be posted on web site March 4.
- lots of records set in Q4 and 2021 full year 

- 2021 investment return $4.4 billion = 9.2%. With 1/2 of portfolio essentially earning nothing. 

- continue to believe stock portfolio is undervalued

- driven by concerns with inflation, 50% of investment portfolio is in cash and short term investments. Not getting paid for taking interest rate risk.  This lowers interest income in the short term. But provides protection should interest rates increase. With this defensive posture they are able to take advantage of an increase in rates. Every 100 basis point increase will add $250 million in investment income. We have already seen a 50 basis point increase. 

- entering 2022 see significant opportunity for growth in underwriting. Market conditions remain favourable. Overall rate increases remain attractive. 
- Company underwriting expense ratio 1% lower in 2021. Driven by Allied.

- remainder of Digit transaction will close in Q1.
-Brit (ex Ki) grew premiums 17%; 95 CR

- Ki: 2021 CR = 113.5; Q4 CR = 88?

- Odyssey equity transaction: only 9.9% interest was ‘written up’. No gain recoded on remaining stake owned by Fairfax. 

- 2 portfolio transfers were one offs. Brit to Riverstone (part they sold). Crum to Riverstone (part still owned by Fairfax)

- corporate overhead charge of $183 million: partly due to goodwill and intangible asset charge

- TRS FFH position: rolled and extended. Continue to see shares as undervalued.

- Fairfax India: want to partner with founders who want to continue running the business. They are not a private equity shop.

 

Edited February 11, 2022 by Viking

[nwoodman]

25 minutes ago, Viking said:

Here a couple of take-aways from the Q4 earnings conference call. I tried to focus on stuff i did not see in the news release.

 

 

Great summary.  Nothing to add although I did add to my position. Visibility/Prospects/Discount are just to appealing. 
 

The CC was about the most coherent and un-flustered Prem has sounded in a while.  Giving out his personal email address at Fairfax was quite surprising though, no doubt it is vetted by assistants etc

[StubbleJumper]

I was puzzled by the people on the call belly-aching about the substantial issuer bid.  It's not like an SIB is particularly exotic.

 

 

SJ

[Viking]

51 minutes ago, nwoodman said:

Great summary.  Nothing to add although I did add to my position. Visibility/Prospects/Discount are just to appealing. 
 

The CC was about the most coherent and un-flustered Prem has sounded in a while.  Giving out his personal email address at Fairfax was quite surprising though, no doubt it is vetted by assistants etc

I agree; the information provided/ communicated by Fairfax during the call was pretty well articulated (for the most part). Short and concise. And the key / most important stuff.

 

i also added to my position at end of today. Sold the last of my oil position (locking in a sizeable gain in 6 weeks). And rolled the proceeds back onto Fairfax. The stock is crazy cheap (especially with what we have learned in the past 24 hours). The story continues to improve in significant ways. ‘Watering the flowers’ i think is what Peter Lynch would call it  

Edited February 11, 2022 by Viking

[glider3834]

 

1 hour ago, Viking said:

- Odyssey equity transaction: only 9.9% interest was ‘written up’. No gain recoded on remaining stake owned by Fairfax. 

It starts to get nuts when you start putting valuation on the remaining 90% interest

 

If 10% sale resulted in $429 mil realised capital gain - a sale of remaining 90% (9 x $425 mil) could yield a further realised gain (over book value) of $3.825 bil - divide that by 23.9 mil shares & you get $160 per share which is 25% of Fairfax's market cap that is not reflected in Fairfax's book value.

 

Even if you take a conservative view & dial that number down - or because its OMERS or whatever - it is still going to be significant number & that is just Odyssey - what about the other insurers that Fairfax owns?? 

 

If you do a valuation of Fairfax based on float per common share you start to get a snapshot of that value (maybe theres a chart worth doing there  

 

Odyssey had 28% NWP growth for 2021 & had 49.8% NWP growth in Q4!  Its growing very fast & it has a very long, stable record of underwriting profitability. That really counts too!

Edited February 12, 2022 by glider3834

[nwoodman]

12 minutes ago, glider3834 said:

If you do a valuation of Fairfax based on float per common share you start to get a snapshot of that value (maybe theres a chart worth doing there  

 

Looking forward to the annual report this year.  Prem gave the impression that there would be even more new and improved metrics.

 

This was an interesting observation and response

 

Unidentified Analyst

How are you? Warren Buffett has written extensively about the importance of float. He said that even though float is a liability, if the combined ratio is below 100%, it is actually an asset. Berkshire has $130 billion in float against $700 billion in market cap. Our Fairfax has $26 billion in float against $13 billion in market cap. We are running at a 95% combined ratio. Can you tell us how you think about the value of float to Fairfax? It’s remarkable.

Prem Watsa

You are exactly right, Charles, you understand it. $26 billion of float like it’s just a significant number and combined ratio of 95%, our reserving is very strong. It just shows you how undervalued our company is. And that’s why, I have said, we bought back our stock of 2 million shares.

We will continue to buy back stock. I mean, we can’t control the price of our stock. I said it’s ridiculously cheap, two years ago, I said it again, and then we bought 2 million shares. We will not do -- we are not looking at expanding again, I said. We are not going to issue any shares to buy anything.

Our first consideration is going to buy back shares, not at the expense of our financial position, not at the expense of taking advantage of the property casualty hot market, like we have grown by 25%. Charles, you know, you follow these insurance companies, you compare our growth to anyone else, all internal and you will find that 25% is a very high number.

And we have got companies like Allied at $6 billion, ROC at pretty well $6 billion, come at $4 billion, like we have got pretty significant companies, but it’s a decentralized structure and we can take advantage of the opportunity as we see it always looking after our customers, because the price we are getting for our product is a fair price now, we are getting paid to take the risk. So, yeah, Charles, you are exactly right, $26 billion in float, the market will see it over time. Thank you, Charles. Next question, please, Britney

[bluedevil]

My favorite part:

 

We wrote $23.8 billion in gross premiums in 2021, which is up over $4.8 billion from 2020, essentially all organic. It took us 18 years to reach $4.8 billion. We wrote that in one year in 2021. Congratulations must go to all our presidents who produced this result. 

[Viking]

RBC today raised FFH price target from US$600 to $675. Below is their summary paragraph:

 

“Making all the right moves”
Our view: Probably the best underwriting result we've seen in 20 years following the company. Strong growth in a hard market is true to its playbook and opportunistic. Investment portfolio positioning could also be a '22 tailwind. Add all that to a $1 billion buyback in the quarter and we see a management that is making all the right moves yet a share multiple that still greatly lags peers. We think there is significant room for multiple expansion and continue to view FFH shares as a best-in-class value opportunity at about 0.75x book value.

[lessthaniv]

2 hours ago, StubbleJumper said:

I was puzzled by the people on the call belly-aching about the substantial issuer bid.  It's not like an SIB is particularly exotic.

 

 

SJ

Me too and disclosures were there.  Its not FFH’s duty to let investors know they should actually read it before responding.  

Edited February 12, 2022 by lessthaniv

[nwoodman]

One other thing that has been rattling around in my head after the CC was this:

 

Please note, that’s with half the portfolio, earning nothing because it had been cash and short-term securities. Of course, this includes $1.5 billion from Digit where they have completed a significant portion of the announced $200 million capital raise at a valuation of $3.5 billion. Kamesh Goyal have done an outstanding job at Digit and Digit is growing at 30% to 40% per year and it’s profitable.

 

I recall that the aim was to get Digit to break even around about this time which I think is pretty amazing for a startup.  However, does this comment imply that the goal has been reached and then some?  Perhaps I am reading too much into it