Fairfax 2023

[Viking]

With the Fairfax Q4 report set to be released after markets close on Thursday here are a few of the things i will be watching.

 

Insurance: 

1.) what is top line growth? Mid teens? Other insurers are reporting deceleration in top line (still healthy).

- what increases is reinsurance seeing? What is outlook for 2023?

2.) what is Q4 CR? What is full year CR? Does it come in with a 95 handle? Some insurers reported adverse development. 

- where does Brit come in?

- what is adverse development for runoff? $150-$200 million?

- Q4 is when Fairfax does its actuarial review.

3.) update on hard market. What is outlook?

Bond portfolio

4.) what kind of increase do we see in interest income? What is new run rate for interest and dividend income? (Was $950 million end of Q2 and $1.2 billion the end of Q3.)

5.) what changes, if any, do we see in composition of bond portfolio?
6.) what is average duration? (1.2 years at June 30 and 1.6 years at Sept 30)

7.) any mark to market losses?

 

Equity Portfolio 

8.) what is amount of mark to market gain? (My estimate is around $300 million.)

9.) any material changes in holdings?

10.) any commentary on Atlas take private?

 

Other

11.) share of profits of associates? $250 million?

- what are earnings from consolidated equities? (Recipe, Grivalia Hospitality, Dexterra etc)

12.) Book value? (Was US$570/share at Sept 30.)

13.) share buybacks during quarter? (At Sept 30 there were 23.45 million common shares effectively outstanding.)

14.) cash at hold co? (Fell to $800 million at Sept 30; below $1 billion target)

- net debt? Change from Q3? 

15.) capital allocation priority moving forward?

- level of debt is ok (although $750 million added in Q3)

- continue to fund growth at subs in hard market?

- buy back stock?

- invest in equities?

- other?

 

Updates/Commentary:

16.) pet insurance sale closed Oct 31: proceeds used for? Any remaining proceeds to be used for?

17.) Resolute Forest Products sale: set to close 1H 2023… any update?
18.) Ambridge Partners: $400 million sale. Details? Size of realized gain?

19.) update: regulatory approval to take control of Digit? Status of IPO?

—————

Is Fairfax on glide path to earn $2.4 billion from underwriting income + interest and dividend income in 2023?

Edited February 12, 2023 by Viking

[Xerxes]

23 hours ago, Viking said:

Its not the $100 million purchases/decisions i worry about. Its the $500 million and up purchases/decisions. But Fairfax has been putting alot of cookies back in the cookie jar the past couple of years with their big decisions:

 

In the last 5 years, it was the Blackberries/Resolutes that drove the headline and with it the optics as it was the only proxy available that outsiders could gauge their investment prowess.
 

The outsiders had no gauge or proxy on the “pet insurance” like organic growth and other internal gems where value could have been crystallized. 

 

Part of that it is the investor fault for lacking imagination but part of it is the management fault that likes to play things close to the vest. And just says “trust us”. 
 

looking forward to Friday. 

[SafetyinNumbers]

1 hour ago, Xerxes said:

In the last 5 years, it was the Blackberries/Resolutes that drove the headline and with it the optics as it was the only proxy available that outsiders could gauge their investment prowess.
 

The outsiders had no gauge or proxy on the “pet insurance” like organic growth and other internal gems where value could have been crystallized. 

 

Part of that it is the investor fault for lacking imagination but part of it is the management fault that likes to play things close to the vest. And just says “trust us”. 
 

looking forward to Friday. 

If any other P&C insurer had made the Digit investment, they would probably get a premium multiple for it. 

[StubbleJumper]

1 hour ago, Xerxes said:

In the last 5 years, it was the Blackberries/Resolutes that drove the headline and with it the optics as it was the only proxy available that outsiders could gauge their investment prowess.
 

The outsiders had no gauge or proxy on the “pet insurance” like organic growth and other internal gems where value could have been crystallized. 

 

Part of that it is the investor fault for lacking imagination but part of it is the management fault that likes to play things close to the vest. And just says “trust us”. 
 

looking forward to Friday. 

 

It's not that investors lacked imagination.  It's just that we also saw Toronto Star and Farmers Edge, amongst others.  It's been a mixed bag.  Happily, the winners are a larger magnitude than were the losers over the past few years.  And the poor execution on Blackberry certainly didn't help as FFH could have easily recovered half the of capital invested in BB by selling the equities and then they could still be holding the converts.  To be honest, it's been a bit of a mixed bag on the investments.

 

 

SJ

[valuesource]

23 hours ago, Viking said:

With the Fairfax Q4 report set to be released after markets close on Thursday here are a few of the things i will be watching.

 

Insurance: 

1.) what is top line growth? Mid teens? Other insurers are reporting deceleration in top line (still healthy).

- what increases is reinsurance seeing? What is outlook for 2023?

2.) what is Q4 CR? What is full year CR? Does it come in with a 95 handle? Some insurers reported adverse development. 

- where does Brit come in?

- what is adverse development for runoff? $150-$200 million?

- Q4 is when Fairfax does its actuarial review.

3.) update on hard market. What is outlook?

Bond portfolio

4.) what kind of increase do we see in interest income? What is new run rate for interest and dividend income? (Was $950 million end of Q2 and $1.2 billion the end of Q3.)

5.) what changes, if any, do we see in composition of bond portfolio?
6.) what is average duration? (1.2 years at June 30 and 1.6 years at Sept 30)

7.) any mark to market losses?

 

Equity Portfolio 

8.) what is amount of mark to market gain? (My estimate is around $300 million.)

9.) any material changes in holdings?

10.) any commentary on Atlas take private?

 

Other

11.) share of profits of associates? $250 million?

- what are earnings from consolidated equities? (Recipe, Grivalia Hospitality, Dexterra etc)

12.) Book value? (Was US$570/share at Sept 30.)

13.) share buybacks during quarter? (At Sept 30 there were 23.45 million common shares effectively outstanding.)

14.) cash at hold co? (Fell to $800 million at Sept 30; below $1 billion target)

- net debt? Change from Q3? 

15.) capital allocation priority moving forward?

- level of debt is ok (although $750 million added in Q3)

- continue to fund growth at subs in hard market?

- buy back stock?

- invest in equities?

- other?

 

Updates/Commentary:

16.) pet insurance sale closed Oct 31: proceeds used for? Any remaining proceeds to be used for?

17.) Resolute Forest Products sale: set to close 1H 2023… any update?
18.) Ambridge Partners: $400 million sale. Details? Size of realized gain?

19.) update: regulatory approval to take control of Digit? Status of IPO?

—————

Is Fairfax on glide path to earn $2.4 billion from underwriting income + interest and dividend income in 2023?

It's hard to add to what Viking says.  He doesn't miss much.  BMO is expecting 20% growth YOY which may be aggressive, considering other insurers (WRB-NY, IFC-T, etc...) are reporting less growth.  With FFH we have about 25% in Reinsurance which will likely benefit the CR.  BMO target EPS is almost $71 and he expects $44/sh from the sale of Crum's Pet Insurance biz, $10/sh from the SWAPs and $4 from Equity Gains.  His CR Estimate is 93% (with 4pts of Cat and 1 pt favourable reserve development).  This is higher than the Q3/22 CR of 86% and higher than Q4/21's 88 CR.  They think Book Value will increase 13% QOQ to $648.

 

I'm still long.

[valuesource]

On 2/13/2023 at 2:50 PM, valuesource said:

It's hard to add to what Viking says.  He doesn't miss much.  BMO is expecting 20% growth YOY which may be aggressive, considering other insurers (WRB-NY, IFC-T, etc...) are reporting less growth.  With FFH we have about 25% in Reinsurance which will likely benefit the CR.  BMO target EPS is almost $71 and he expects $44/sh from the sale of Crum's Pet Insurance biz, $10/sh from the SWAPs and $4 from Equity Gains.  His CR Estimate is 93% (with 4pts of Cat and 1 pt favourable reserve development).  This is higher than the Q3/22 CR of 86% and higher than Q4/21's 88 CR.  They think Book Value will increase 13% QOQ to $648.

 

I'm still long.

That print looks pretty good to me.

[gfp]

https://www.fairfax.ca/news/press-releases/press-release-details/2023/Fairfax-Financial-Holdings-Limited-Financial-Results-for-the-Year-Ended-December-31-2022/default.aspx

 

PDF here:

https://s1.q4cdn.com/579586326/files/doc_news/2023/FFH-2022-Q4-Press-Release-(revised)-Final-for-website.pdf

[gary17]

not bad

[valuesource]

Highlighting again that Analysts have a great deal of trouble predicting FFH earnings.  Luckily, we get into the weeds.

FFH-2022-Q4-Press-Release-(revised)-Final-for-website.pdf

[Candyman1]

book value per share of 657 plus about 13 in per share in carrying value of non insurance subs

 

this is interesting "On January 1, 2023 the company adopted the new accounting standard for insurance contracts ("IFRS 17") which will first be presented in the company's consolidated financial reporting in the first quarter of 2023, with comparative periods restated. IFRS 17 brings considerable changes to the measurement, presentation and disclosure of the company’s insurance and reinsurance operations. It will not, however, affect the company's underwriting strategy, its prudent reserving, management's use of the traditional performance metrics of gross premiums written, net premiums written and combined ratios, or the company's cash flows. The company anticipates recording a transition adjustment to increase opening common shareholders' equity as at January 1, 2022 which is not expected to exceed 2.5% of common shareholders’ equity as at December 31, 2021, primarily reflecting a decrease to insurance contract liabilities from the introduction of discounting claims reserves and the deferral of additional insurance acquisition costs which were previously expensed as incurred, partially offset by a new risk adjustment for uncertainty related to the timing and amount of cash flows arising from non-financial risks. Given the increasing interest rate environment experienced throughout 2022 and the beneficial impact it will have on the discounting of claims reserves under IFRS 17, the company anticipates recording a material benefit to the restated consolidated statement of earnings for the full year of 2022 and common shareholders’ equity as at December 31, 2022."

Looks like in Q1 2023 we will see "a material benefit to equity per share based on the above. Had no idea this had happened.

 

New shares FFH outstanding end q4 was 23.3 million.

 

My guess is that on the bonds we should get back between 15 and 25 dollars per share from the 2022 losses just from runoff ...

 

38 billion in cash and fixed income with duration of 1.6 years ... new fixed income run rate is 1.5 billion and about 9.4 billion in short term/cash and 28.6 billion invested in fixed income, mostly 1 to 3 years ...

 

Looks nice overall ...

Edited February 16, 2023 by Candyman1

[valuesource]

Good job guys!

 

[Xerxes]

Shouldn't this be included in their table

 

On October 31, 2022 the company sold its interests in the Crum & Forster Pet Insurance Group and Pethealth, including all of their worldwide operations, to Independence Pet Group and certain of its affiliates, which are majority owned by JAB Holding Company, for $1.4 billion, paid as $1.15 billion in cash and $250.0 in debentures, as a result of which the company recorded a pre-tax gain of $1.2 billion and an after-tax gain of $933.9 million.

 

[Candyman1]

1 minute ago, Xerxes said:

Shouldn't this be included in their table

 

On October 31, 2022 the company sold its interests in the Crum & Forster Pet Insurance Group and Pethealth, including all of their worldwide operations, to Independence Pet Group and certain of its affiliates, which are majority owned by JAB Holding Company, for $1.4 billion, paid as $1.15 billion in cash and $250.0 in debentures, as a result of which the company recorded a pre-tax gain of $1.2 billion and an after-tax gain of $933.9 million.

 

Yeah, good point ... I think they might want to only include going forward assets ... 

[Candyman1]

16 minutes ago, valuesource said:

Good job guys!

 

19.11 bv per share 

 

Just a thought ... isn't Adani kinda played out ... seems like he was absorbing massive amounts of investments in India ... I wonder if it made the investment space for Fairfax India better ... now India is a lot bigger than Adani, but it seems to me he was absorbing massive amounts of infrastructure investments. Just a thought.

[valuesource]

16 minutes ago, Candyman1 said:

19.11 bv per share 

 

Just a thought ... isn't Adani kinda played out ... seems like he was absorbing massive amounts of investments in India ... I wonder if it made the investment space for Fairfax India better ... now India is a lot bigger than Adani, but it seems to me he was absorbing massive amounts of infrastructure investments. Just a thought.

I bet he would offer more than 1.7B for BIAL

[valuesource]

[MMM20]

That report should be more than enough for the quants and more backward looking and quality growth types to push this back up to ~1.5x BV over the next few months, but still not holding my breath.

 

Edited February 17, 2023 by MMM20

[Xerxes]

1 hour ago, Candyman1 said:

Yeah, good point ... I think they might want to only include going forward assets ... 

 

I think in Prem's mind those famous table they put, covers what he considers as investment portfolio (be it long term or short term). Funded by the float.

 

Whereas, the typical one-off asset sales that were part of the operating business, do not show up there. I had noticed the same omissions in other operating assets he sold off. Just remembering now.

 

 

 

[Viking]

Fairfax Q4 results look good to me. The caveat is i am not an accountant, so regarding IFRS 17, and the restatements coming when they report Q1 results, i have nothing to add to what the company disclosed in their release. Is IFRS 17 a positive for shareholders? Perhaps others can wade in and educate us all.

 

Insurance: 

1.) what is top line growth? 

- Gross premiums written in Q4 came in at 5.1%. This is a big surprise to me. We all knew the hard market had to slow at some point. Is it terrible? No, of course not. What is far more important is that Fairfax underwrites profitably.

2.) what is Q4 CR? 90.9 is very good.

- What is full year CR? 94.7 is very good. 

- Any adverse development? Small net favourable development (ex runoff)

- where does Brit come in? Q4 was 88.2 and FY was 97.9 (including Ki)

- what is adverse development for runoff? Less than last year. Amount?

3.) update on hard market. What is outlook? Looks like it is slowing quickly.

will get more colour on conference call. 

Bond portfolio

4.) what kind of increase do we see in interest income? $961.8 million.

- What is new run rate for interest and dividend income? $1.5 billion. Holy moly Batman!

- (Was $950 million end of Q2 and $1.2 billion the end of Q3.) $1.5 billion.

5.) what changes, if any, do we see in composition of bond portfolio? ???
6.) what is average duration? 1.6 years; same as Q3.

- (1.2 years at June 30 and 1.6 years at Sept 30)

7.) any mark to market losses? Small gain in Q4 of $63.8 million.

 

Equity Portfolio 

8.) what is amount of mark to market gain? $521.9 million

9.) and material changes in holdings? No. ???

10.) any commentary on Atlas take private?

 

Other

11.) share of profits of associates? $256 million

12.) Book value? $658/share; up bigly from Q3. 
- Fairfax is one of the few insurers to grow BV in 2022.

13.) share buybacks during quarter? 23.32 million (bought back about 130,000 in Q4)

- (At Sept 30 there were 23.45 million common shares effectively outstanding.)

14.) what is net debt at year end?

15.) capital allocation priority moving forward? We will see what Prem says on conference call.

 

Updates/Commentary:

16.) pet insurance sale closed Oct 31: proceeds used for? Any remaining proceeds to be used for?

17.) Resolute Forest Products sale: set to close 1H 2023… any update?
18.) Ambridge Partners: $400 million sale. Expect $275 million gain pre-tax at close = +$10/share after tax. Excellent.

19.) update: regulatory approval to take control of Digit? Status of IPO?

—————

Is Fairfax on glide path to earn $2.4 billion from underwriting income + interest and dividend income in 2023? No. This number is too low. Glide path likely needs to get increased to $2.6 or $2.7 billion. Wow!

[StevieV]

10 minutes ago, Viking said:

6.) what is average duration? 1.6 years; same as Q3.

- (1.2 years at June 30 and 1.6 years at Sept 30)

 

I thought they'd keep extending the duration.  

 

14 minutes ago, Viking said:

Is Fairfax on glide path to earn $2.4 billion from underwriting income + interest and dividend income in 2023? No. This number is too low. Glide path likely needs to get increased to $2.6 or $2.7 billion. Wow!

 

Not bad at all.  Maybe not as cheap as it was, but hard to see how it isn't a nice holding from here.

[Crip1]

41 minutes ago, StevieV said:

 

I thought they'd keep extending the duration.  

 

Likewise. The one surprise that popped out at me is the average duration of the bond portfolio being unchanged from the end of Q3 as I would have guessed something closer to 2%. It compels me to think that they (Bradstreet) still sees inflationary pressures and, accordingly, did not see the benefit of locking in longer-term yields in Q4 of 2022. That did not look to be the right move in January but so far in February the story has changed.
-Crip

[TwoCitiesCapital]

13 hours ago, Crip1 said:

Likewise. The one surprise that popped out at me is the average duration of the bond portfolio being unchanged from the end of Q3 as I would have guessed something closer to 2%. It compels me to think that they (Bradstreet) still sees inflationary pressures and, accordingly, did not see the benefit of locking in longer-term yields in Q4 of 2022. That did not look to be the right move in January but so far in February the story has changed.
-Crip

 

Definitely disappointed in the lack of duration extension. Rates might be headed back up, but in more and more convinced the 4.25% we saw on the 10-year will be this cycles top. 

 

Wish they'd start locking some of this in for 3+ years so we're not back to limited interest income in 2024. 

Edited February 17, 2023 by TwoCitiesCapital

[valuesource]

On Duration in the Bond portfolio, I thought I saw the US 6 month Tbill at 5.06% in the last 3 days. Maybe Bri  reached another 3 mos more recently?

[Candyman1]

Wow, prem referred to making $100 a share for a number of years.

[StubbleJumper]

10 hours ago, TwoCitiesCapital said:

 

Definitely disappointed in the lack of duration extension. Rates might be headed back up, but in more and more convinced the 4.25% we saw on the 10-year will be this cycles top. 

 

Wish they'd start licking some of this in for 3+ years so we're not back to limited interest income in 2024. 

 

I was a little surprised about that too.  But, one the other hand, with the curve inverting, any of the Tbills or short term treasuries that they roll over the next 6 or 12 months will likely be rolled into much higher interest rates.  The run-rate for interest and dividend income has grown considerably, and strangely, there is still a bit of runway on that.  I get your point about potentially being subject limited interest income, but that is unlikely to occur in 2024 although it does become a risk in 2025 and 2026.

 

In a more general sense, I would observe that it is unreasonable for shareholders to expect that FFH will nail the evolution of the yield curve perfectly, by going long at the perfect moment to get a peak rate for a cycle.  What we need is not perfection, but thoughtful competence.  And, I would say that so far in 2022 and 2023 Bradstreet has given us exactly that.  FFH has done very well due to the thoughtful positioning of its fixed income port.

 

I never particularly like the release of the Q4 financials because it isn't immediately accompanied by a detailed and verbose report.  I guess we'll see in a month exactly what has been done with the maturity profile and the extent to which FFH has (or hasn't) reached for yield by buying bonds from sub-national governments or corporate bonds.

 

 

SJ