Fairfax 2023

[UK]

22 minutes ago, SafetyinNumbers said:

It’s funny, I read the same post and it made me think I was right. I think to take out the IFRS17 plug, you have to assume no premium growth which isn’t consistent with the rest of the forecast.

 

I think you are right, but the question is size of the plug, since YTD it was probably partly/mostly interest rate driven and the impact of reserve growth alone could be much lower in the future?

[glider3834]

Moody's has upgraded Fairfax's senior debt

 

[glider3834]

7 hours ago, StubbleJumper said:

At the end of Q2 the holdco had about US$600m of cash and liquid securities available.

Not sure how you got this number

 

'The company believes that holding company cash and investments, net of holding company derivative obligations, at June 30, 2023 of $1,064.2 provides adequate liquidity to meet the holding company’s remaining known commitments in 2023'

[StubbleJumper]

1 hour ago, glider3834 said:

Not sure how you got this number

 

'The company believes that holding company cash and investments, net of holding company derivative obligations, at June 30, 2023 of $1,064.2 provides adequate liquidity to meet the holding company’s remaining known commitments in 2023'

 

You need to read Note 5 in the Q2.  Of that "billion," $358m are derivatives.  As far as I am concerned, derivatives are not liquidity. 

 

I bemoaned this state of affairs back in August and suggested that FFH would benefit from floating another $500m or $750m of notes because the holdco could use the actual liquidity.  They've pushed back the repurchase of Brit a bit, presumably because they don't want to burn more cash, and they've reduced the pace of common repurchases.  So, either we will see an abnormally large divvy from the insurance subs in the midst of a very profitable hard market, or they'll float some debt, or?

 

 

SJ

[Viking]

8 hours ago, Thrifty3000 said:

Great info @UK. Thanks for sharing. So, incorporating Fairfax's CFO's interpretation of discounting into @Viking's model would result in EPS projections that look more like this:

 

2023: $155

2024: $148

2025: $153

 

@Thrifty3000 and @UK and @SafetyinNumbers (and others), thanks for wading in on this topic. It is great to be able to get others perspectives and debate ideas. Slowly I am learning (yes, I hate that when it happens!).

 

I have made a few changes to my 2023-2025 forecasts for Fairfax, based on the feedback I have been getting from my last update (just a couple of days ago). I think I have said before, I am constantly updating my model to reflect 'new news' (usually weekly). Please keep the questions and comments coming... I will keep making updates to my model and I will keep the updates coming. Continuous improvement is out goal...

 

1.) For 2024 and 2025, I adjusted 'Effect of discounting and risk-adjustment' down. The 2023 number has been increasing as interest rates rise. My assumption for 2024 and 2025 is interest rates stay roughly where they are today - of course, this will likely not be the case. So, I think it makes sense to go with a lower number for 2024 and 2025. Is this number still too high? Too low? Not sure. Like all the other numbers in the spreadsheet, I'll keep an open mind and adjust as needed moving forward. 

2.) For 2023, I adjusted 'Effect of discounting and risk-adjustment' up and 'Net gains (losses) on investments' down to reflect the continued increase in bond yields in Q3. Currency will also be a headwind for Fairfax in Q3, given the US$ strength.

 

Putting it all together, my new forecast is earnings of about $150/share in 2023 and around $160/share in 2024 and 2025.

 

The bear market in bonds had an impact on Fairfax in Q2, 2023. It will be the same in Q3, 2023. So today I am thinking earnings in Q3 might come in closer to $20/share (unrealized losses on bonds/currency will be the headwind). That would put Q4 earnings closer to $40-$45, which seems reasonable (and assumes the GIG acquisition closes in Q4).

 

Please keep the questions coming... the more questions/discussion/debate the better. 

 

 

 

Edited October 12, 2023 by Viking

[UK]

1 hour ago, Viking said:

 

@Thrifty3000 and @UK and @SafetyinNumbers (and others), thanks for wading in on this topic. It is great to be able to get others perspectives and debate ideas. Slowly I am learning (yes, I hate that when it happens!).

 

I have made a few changes to my 2023-2025 forecasts for Fairfax, based on the feedback I have been getting from my last update (just a couple of days ago). I think I have said before, I am constantly updating my model to reflect 'new news' (usually weekly). Please keep the questions and comments coming... I will keep making updates to my model and I will keep the updates coming. Continuous improvement is out goal...

 

1.) For 2024 and 2025, I adjusted 'Effect of discounting and risk-adjustment' down. The 2023 number has been increasing as interest rates rise. My assumption for 2024 and 2025 is interest rates stay roughly where they are today - of course, this will likely not be the case. So, I think it makes sense to go with a lower number for 2024 and 2025. Is this number still too high? Too low? Not sure. Like all the other numbers in the spreadsheet, I'll keep an open mind and adjust as needed moving forward. 

2.) For 2023, I adjusted 'Effect of discounting and risk-adjustment' up and 'Net gains (losses) on investments' down to reflect the continued increase in bond yields in Q3. Currency will also be a headwind for Fairfax in Q3, given the US$ strength.

 

Putting it all together, my new forecast is earnings of about $150/share in 2023 and around $160/share in 2024 and 2025.

 

The bear market in bonds had an impact on Fairfax in Q2, 2023. It will be the same in Q3, 2023. So today I am thinking earnings in Q3 might come in closer to $20/share (unrealized losses on bonds/currency will be the headwind). That would put Q4 earnings closer to $40-$45, which seems reasonable (and assumes the GIG acquisition closes in Q4).

 

Please keep the questions coming... the more questions/discussion/debate the better. 

 

 

 

 

Thanks, Viking! With so much moving parts and different earning streams, FFH is one of the companies, which earnings is extremely hard to model (and maybe it is a plus and an opportunity vs analysts/market), but I think you did an incredible job doing this.

 

[Thrifty3000]

12 minutes ago, UK said:

 

Thanks, Viking! With so much moving parts and different earning streams, FFH is one of the companies, which earnings is extremely hard to model (and maybe it is a plus and an opportunity vs analysts/market), but I think you did an incredible job doing this.

 

Hear, hear  

[Thrifty3000]

 

Wow. Progressive just posted 3rd quarter results and their YOY numbers are SOLID. Net premiums up 22%. CR of 92.4 vs 99.2 last year. Policies in force up 10%. Also looks like they've been issuing shares, which makes sense given how richly priced they are. Their shares are up over 7% today. Hopefully these results are indicative of what we can expect from FFH this quarter.

 

 

 

[SafetyinNumbers]

I don’t think I fully appreciated how much Fairfax would have earned last year if IFRS 17 had been implemented a year earlier. I know they got the full benefit in the book value at the beginning of year and it’s helped by half a billion or so this year (so far) but to actually report the earnings would have had a bigger impact on valuation I think. It also really highlights the spectacular macro call of keeping short duration on the bond portfolio. 
 

IFRS 17 only increased book at Jan 2022 by ~$150m. The majority of benefit actually came in 2022 as rates increased substantially. The restated H12022 results go from a big loss to a profit.

[glider3834]

On 10/12/2023 at 10:48 AM, StubbleJumper said:

 

You need to read Note 5 in the Q2.  Of that "billion," $358m are derivatives.  As far as I am concerned, derivatives are not liquidity. 

 

I bemoaned this state of affairs back in August and suggested that FFH would benefit from floating another $500m or $750m of notes because the holdco could use the actual liquidity.  They've pushed back the repurchase of Brit a bit, presumably because they don't want to burn more cash, and they've reduced the pace of common repurchases.  So, either we will see an abnormally large divvy from the insurance subs in the midst of a very profitable hard market, or they'll float some debt, or?

 

 

SJ

they paid 380M dividends from insur/reinsu subs to Holdco in 2022 (excl C&F pet sale div) but only $79M in 1H23 so far (excl Brit div from Ambridge sale). So just to match 2022, they would need to pay another $300M divs to Holdco in 2H23.

 

Looking at 1H23 operating income of insur/reinsur subs of $1.75B (vs $1.2B in 1H22) or increase of 46% YoY, & if things continue int he same trend over the 2H23, I think insurance subs might build decent amount of div capacity on top of $2.7B (rounded) level at 31 Dec2022.

 

In 2022, the subs built up around $700M in div capacity (ie from $2B to $2.7B),  after paying $380M in divs to the Holdco (with group interest and dividend income $960M in 2022) 

 

So if operating earnings of these insurance subs in 2023 are now trending over 40% above 2022 (with group interest & dividends expected at over $1.5B in 2023) , then couldn't we see an even bigger build in div capacity in insur/reinsur subs in 2023 assuming same divs paid to Holdco as in 2022?

 

We are still not through end of hurricane season (he says with fingers crossed  ) ,& there are always other risks that could create volatility in insur sub operating results, so nothing is guaranteed of course with the above, but really I am just trying to extrapolate what trends I can see in operating result of the insurance subs YTD 

 

SJ I do agree with you it would be better to see more cash in the Holdco over time

 

Edited October 16, 2023 by glider3834

[MMM20]

"Overall, it's still a tough environment for our insurance risk-bearing partners. They are grappling with stubbornly high loss cost inflation and more catastrophe losses at higher reinsurance attachment points. So when I roll it all together, we are not seeing and don't expect a meaningful slowdown in primary P/C rate increases. And thus, we remain steadfast and focused on helping our clients navigate and mitigate premium increases." - Arthur J Gallagher (AJG ) CEO Patrick Gallagher

[Luke]

Tbh, i cant find anything that has as good a setup for the next 2-3 years as FFH. Its not only a hedge but even a compounder id gladly buy, if a recession hits, nice, if it doesnt we are also fine. Really thinking of increasing my ridiculous close to 50% position even more because if i look at everything else i can easily see how things go at least sideways or worse and FFH wont suffer under most circumstances except extreme climate events which can blow it down temporarily. 

[Luke]

Even their stock portfolio consists of value and things that are cheap and ownable now...id even sleep well with 100% in FFH but scratching my head if I should go even more overweight.

[StubbleJumper]

34 minutes ago, Luca said:

Even their stock portfolio consists of value and things that are cheap and ownable now...id even sleep well with 100% in FFH but scratching my head if I should go even more overweight.

 

I understand the sentiment, and I even bought a little more a couple of weeks ago.  I should not have added a single penny to my FFH position because it was already larger than it should have been, but the prospects over the next couple of years are so compelling, that it strikes me as one of the more straightforward opportunities currently available.  I am not at 50% like you, but rather more like 35%, which is already far too much from a basic risk management perspective.

 

I would consider going higher yet, but we should never forget that Prem has come close to driving it into a wall on a couple of occasions.

 

 

SJ

[Luke]

21 minutes ago, StubbleJumper said:

 

I understand the sentiment, and I even bought a little more a couple of weeks ago.  I should not have added a single penny to my FFH position because it was already larger than it should have been, but the prospects over the next couple of years are so compelling, that it strikes me as one of the more straightforward opportunities currently available.  I am not at 50% like you, but rather more like 35%, which is already far too much from a basic risk management perspective.

 

I would consider going higher yet, but we should never forget that Prem has come close to driving it into a wall on a couple of occasions.

 

 

SJ

Yeah well said

[sleepydragon]

What does people think of FFH’s association with Sokol? Buffett fired him but Prem welcomed him in both hands. This guy also issued a statement supporting the “female Steve job” Holmes.

[gfp]

11 minutes ago, sleepydragon said:

What does people think of FFH’s association with Sokol? Buffett fired him but Prem welcomed him in both hands. This guy also issued a statement supporting the “female Steve job” Holmes.

 

I don't think Sokol is as problematic as many seem to.  I don't even think Warren and Charlie were that upset with him.  The Holmes letter was just because he is very active in the Horatio Alger society and had gotten to know her through that group.

 

Personally I think the relationship between Fairfax and Sokol will be a big positive for Fairfax.  Aviation Gin already worked out well for them together.

[bluedevil]

It is surprising to me that the price of Fairfax or Markel has not responded more significantly to the 100bps rise in interest rates (10y) over the past 3 months.  The key asset of an insurance company is the ability to collect premiums now and pay them out later.  Given this deferral feature is now worth much more, I would have expected more of a reaction. 

[MMM20]

21 minutes ago, bluedevil said:

It is surprising to me that the price of Fairfax or Markel has not responded more significantly to the 100bps rise in interest rates (10y) over the past 3 months.  The key asset of an insurance company is the ability to collect premiums now and pay them out later.  Given this deferral feature is now worth much more, I would have expected more of a reaction. 

 

Voting machine in the short run.

[gfp]

23 minutes ago, bluedevil said:

It is surprising to me that the price of Fairfax or Markel has not responded more significantly to the 100bps rise in interest rates (10y) over the past 3 months.  The key asset of an insurance company is the ability to collect premiums now and pay them out later.  Given this deferral feature is now worth much more, I would have expected more of a reaction. 

 

Yeah, same deal with Berkshire - stock is down and hurricane season and their several billion dollar profit are pretty much locked in - plus a huge amount of cash earning 5.5% vs negative cost funding.  Sometimes it takes an earnings release to wake people up

[StubbleJumper]

29 minutes ago, bluedevil said:

It is surprising to me that the price of Fairfax or Markel has not responded more significantly to the 100bps rise in interest rates (10y) over the past 3 months.

 

There is quite often pressure on FFH's share price in September and October, which I tend to attribute to the market's fixation on hurricanes.  But, the Q3 will be released shortly, and my guess is that the market will wake up.  If you have any desire at all to add to your position, earlier this week might have been the best chance!

 

 

SJ

[sleepydragon]

32 minutes ago, bluedevil said:

It is surprising to me that the price of Fairfax or Markel has not responded more significantly to the 100bps rise in interest rates (10y) over the past 3 months.  The key asset of an insurance company is the ability to collect premiums now and pay them out later.  Given this deferral feature is now worth much more, I would have expected more of a reaction. 

I think mkl‘s bond portfolio has longer duration, something like 5 years. 
only WRB and FFH has positioned themselves in short term bills.
 

[gfp]

13 minutes ago, sleepydragon said:

only WRB and FFH has positioned themselves in short term bills.

 

And, cough, Berkshire.  Shorter than them all.

[sleepydragon]

8 minutes ago, gfp said:

 

And, cough, Berkshire.  Shorter than them all.

Indeed

[dealraker]

34 minutes ago, gfp said:

 

Yeah, same deal with Berkshire - stock is down and hurricane season and their several billion dollar profit are pretty much locked in - plus a huge amount of cash earning 5.5% vs negative cost funding.  Sometimes it takes an earnings release to wake people up

Tropical storm Tammy is headed to the US and is near certain to be a hurricane.  LOL, we are close to the end of hurricane season but it ain't locked in.