Fairfax 2023

[Xerxes]

If we were to put the FFH story in terms of two or three phases,

phase [A] would be the re-pricing of assets, and using their optionally when the cost of capital went up. That phase is over. 
 

They got themselves a “pipeline” of value creation (duration extended) for couple of years. Let call that upcoming couple of years as phase [B]. 

And then the next phase [C] starts. Previously they indicated their game plan is (1) move to credit as spread opens up (2) return capital when it is no longer needed to feed the insurance sub.  
 

Idea (1) is unlikely in the short term. But who knows maybe in two years time macro will be different and spread will blow out. Which means more likely it will be return of capital (2), if nothing else happens. 
 

there is even an unsaid option (3): which is to crystallize the unrealized gain in the bonds upfront by selling out but also forgoing the interest payments. But option (3) and (1) go hand in hand. They would sell government bonds only to go to riskier asset if value/risk reward is there. 
 

 

 

Edited December 14, 2023 by Xerxes

[Munger_Disciple]

36 minutes ago, Santayana said:

I just renewed a policy for my small business, and Chubb was able to quote me a rate about 35% less than The Hartford was asking.  The Hartford quote was a 10% increase on what they charged last year.

 

 

Wow, that's a big difference. Congrats!

[OCLMTL]

Market wide drawdown in the safe heavens, with Intact's drop today the biggest since February I think. That tells you something...just a huge top down/sector rotation post FOMC comments yesterday and 10 yr dipping below 4%. 

I'm frankly quite impressed with FFH being down 4% earlier today and then almost going back in the green...very solid market action. We'll see about the close but certainly some investors using this opportunity to add on weakness while perhaps more quant-oriented sellers get out to re-invest proceeds in "lower yield friendly" investments. 

[netcash1]

Go Digit growth rate and market share

 

[Viking]

Earlier today, KIPCO announced the closing of the sale of their 46.3% interest in the Gulf Insurance Group (GIG) to Fairfax. Fairfax’s equity interest in GIG increased from 43.7% to a controlling interest of 90.0%.

 

Based on the financial details that were provided in Fairfax’s Q3 interim report, Fairfax is making an upfront payment of around $177 million. And then 4 equal annual payments of $165 million, beginning Dec 14, 2024.

 

“The company's acquisition of all of KIPCO's shares in Gulf Insurance will be for aggregate fair valuation consideration of approximately $740 (approximately 227 million Kuwaiti Dinar), to be paid as approximately $177 in cash ($200.0 less dividends of approximately $23 received by KIPCO during the second quarter of 2023) and the fair value of approximately $563 in a payment deed.”

 

Fairfax will book a significant gain of around $290 million when it reports Q4 results.

 

“Accordingly, the company anticipates that upon closing it will consolidate the assets and liabilities of Gulf Insurance and will record a pre-tax gain of approximately $290, with changes in the company's carrying value of its equity accounted investment in Gulf Insurance up until the date of closing affecting the pre-tax gain.”

 

This purchase will be an important growth driver for Fairfax’s results in 2024. The timing of the news is important (before year-end), so we will get more complete details of the financial impact on Fairfax when they report Q4 results in Feb 2024. Now that the deal has closed, analysts can include GIG in their estimates for Fairfax for 2024.

 

Below are highlights of GIG’s full year financial results from 2022:

• Net premiums written       $1.7 billion
• Underwriting surplus         $164 million
• Total Investments              $2.4 billion
• Shareholder’s equity          $748 milion
• Net profit                            $125 million

Some random thoughts on the GIG purchase:

• Fairfax goes from being a minority shareholder in GIG to the controlling shareholder. This is a big deal.
• Strategically, this secures Fairfax’s position as one of the leading P&C insurance providers in the Middle East North Africa (MENA) region. This is a big deal. Gulf economies, with young and growing populations, are expected to be strong growers in the coming decade. Growing economies should be good for an insurance business.

This purchase highlights a couple of strengths of Fairfax: 

• International - this has been a growing part of Fairfax’s insurance business for 20 years
• Partner with leading organizations - in this case KIPCO
• Long term focus - this transaction was incubating for 13 years

Capital allocation

 

Fairfax is earning a record amount of operating earnings in 2023 and the set-up for the next couple of years looks outstanding. What will Fairfax do with all the cash that is raining down?

 

“The best stock to buy is the one you already own.” Peter Lynch

 

The past couple of years, Fairfax has been cannibal investing (gorging) - buying significantly more of companies it already owns. GIG is the latest example of this strategy. Fairfax owned 43.7% and now they own 90%.

 

This is such a good strategy because it is very low risk. They understand GIG very well, having been closely involved with the company for the past 13 years. Fairfax is also paying up for quality (and to get control of the company).

 

Bottom line, this purchase makes Fairfax a more profitable and higher quality company.

 

 —————

 

GIG recently updated their web site. They added lots of new information. Below are links to a couple of presentations and investor relations.

 

Investor Presentation – May 2023 (short – 7 pages)

• https://www.gulfinsgroup.com/media/GIG_Investor_Presentation_2023_EN_Final.pdf

Corporate Profile

• https://www.gulfinsgroup.com/media/GIG-Corporate-Profile-ENG_D5wymRk.pdf

Investor Relations

• https://www.gulfinsgroup.com/en/investor-relations/

—————

 

In 2010, Fairfax invested $217 million for a 41.3% interest in Gulf Insurance. Fairfax partnered with KIPCO (Kuwait), the controlling shareholder of Gulf Insurance.

 

GIG became the vehicle for Fairfax to grow its insurance business in the MENA region (Middle East North Africa). The growth for the next 10 years was largely organic.

 

Late in 2020, as the world was struggling with covid, GIG opportunistically agreed to purchase the insurance operations of AXA Gulf & Yusuf Bin Ahmed Kanoo for $475 million. This purchase almost doubled the size of GIG - it was a big, bold move. Parent AXA was looking to re-build its capital levels due to losses experienced from covid. The purchase closed in Sept of 2021. Fairfax did invest new money in GIG (as did KIPCO) in 2021 to keep its ownership in GIG steady at 43.7% (not sure exactly how much they spent).

 

The shares of GIG are publicly traded on the Kuwait stock exchange. However, they are thinly traded, with KIPCO and Fairfax together owning 90%.

 

Who is KIPCO? 

 

Kuwait Projects Company (Holding) – KIPCO – is a holding company that focuses on investments in the Middle East and North Africa. It’s strategy of acquiring, building, scaling and selling companies in the MENA region has worked successfully for over 30 years.

• https://kipco.com

 —————

Historical Information

 

 

 —————

Prem’s comments about GIG from Fairfax’s 2022AR.

 

“Gulf Insurance Group had another excellent year led by CEO Khaled Saoud Al-Hasan and GIG Gulf CEO Paul Adamson. 2022, the first full year with GIG Gulf results, produced gross premiums of over $2.5 billion and a combined ratio of approximately 92%. We have a wonderful partnership with Kipco, led by CEO Sheikha Dana, in the ownership of Gulf Insurance.”

 

“Bijan (Khosrowshahi), along with Jean Cloutier, have been deeply involved with Gulf Insurance Group in the Middle East as well. After the acquisition of AXA Gulf (now GIG Gulf) in 2021, Gulf Insurance is one of the most prominent players in the region. Led by Khaled Al-Hasan, with Paul Adamson running GIG Gulf as a standalone unit, Gulf Insurance will be an increasingly important contributor to Fairfax.”

----------

From Fairfax's Q3 interim earnings report

 

Subsequent to September 30, 2023 

Acquisition of additional interest in Gulf Insurance 

 

"On April 19, 2023 the company entered into an agreement to acquire all shares of Gulf Insurance under the control of KIPCO and certain of its affiliates, representing 46.3% of the equity of Gulf Insurance. In accordance with applicable Kuwaiti regulatory requirements and the rules of the Boursa Kuwait, the exchange on which Gulf Insurance’s shares are traded, the company will pay the purchase price to KIPCO in full in Kuwaiti Dinar on closing. Pursuant to the terms of the agreement, immediately following settlement of the transaction, KIPCO shall return to the company in cash the full purchase price less an amount of Kuwaiti Dinar equal to $200.0, together with a cash payment equal to all dividends received by KIPCO from Gulf Insurance after January 1, 2023, and the company will deliver to KIPCO a payment deed of $660.0 which requires the company to make four equal annual payments of $165.0 to KIPCO beginning on the first anniversary of closing of the transaction. 

 

"The company's acquisition of all of KIPCO's shares in Gulf Insurance will be for aggregate fair valuation consideration of approximately $740 (approximately 227 million Kuwaiti Dinar), to be paid as approximately $177 in cash ($200.0 less dividends of approximately $23 received by KIPCO during the second quarter of 2023) and the fair value of approximately $563 in a payment deed. Closing of the transaction is subject to customary closing conditions, including regulatory approvals, and is expected to be in the fourth quarter of 2023. On closing of the transaction, the company's equity interest in Gulf Insurance will increase from 43.7% to a controlling interest of 90.0%. Accordingly, the company anticipates that upon closing it will consolidate the assets and liabilities of Gulf Insurance and will record a pre-tax gain of approximately $290, with changes in the company's carrying value of its equity accounted investment in Gulf Insurance up until the date of closing affecting the pre-tax gain."

[Viking]

13 hours ago, Hoodlum said:

The GIG sale has now closed. 
 

https://www.zawya.com/en/press-release/companies-news/kipco-completes-the-sale-of-its-46-stake-in-gig-to-fairfax-financial-holdings-yi3hmkx4?amp=1

 

@Hoodlum thanks for posting... made my day!

[Haryana]

Guessing Q4 income to be over 1.5 billion.

 

[Xerxes]

I always wondered if the fellow Bijan Khosrowshahi (Fairfax International) is part of the greater Khosrowshahi clan, with Dara and his uncle (FutureShop founder). 
 

There is barely any info on Bijan on line. 

[UK]

5 hours ago, Viking said:

Earlier today, KIPCO announced the closing of the sale of their 46.3% interest in the Gulf Insurance Group (GIG) to Fairfax. Fairfax’s equity interest in GIG increased from 43.7% to a controlling interest of 90.0%.

 

Based on the financial details that were provided in Fairfax’s Q3 interim report, Fairfax is making an upfront payment of around $177 million. And then 4 equal annual payments of $165 million, beginning Dec 14, 2024.

 

“The company's acquisition of all of KIPCO's shares in Gulf Insurance will be for aggregate fair valuation consideration of approximately $740 (approximately 227 million Kuwaiti Dinar), to be paid as approximately $177 in cash ($200.0 less dividends of approximately $23 received by KIPCO during the second quarter of 2023) and the fair value of approximately $563 in a payment deed.”

 

Fairfax will book a significant gain of around $290 million when it reports Q4 results.

 

“Accordingly, the company anticipates that upon closing it will consolidate the assets and liabilities of Gulf Insurance and will record a pre-tax gain of approximately $290, with changes in the company's carrying value of its equity accounted investment in Gulf Insurance up until the date of closing affecting the pre-tax gain.”

 

This purchase will be an important growth driver for Fairfax’s results in 2024. The timing of the news is important (before year-end), so we will get more complete details of the financial impact on Fairfax when they report Q4 results in Feb 2024. Now that the deal has closed, analysts can include GIG in their estimates for Fairfax for 2024.

 

Below are highlights of GIG’s full year financial results from 2022:

• Net premiums written       $1.7 billion
• Underwriting surplus         $164 million
• Total Investments              $2.4 billion
• Shareholder’s equity          $748 milion
• Net profit                            $125 million

Some random thoughts on the GIG purchase:

• Fairfax goes from being a minority shareholder in GIG to the controlling shareholder. This is a big deal.
• Strategically, this secures Fairfax’s position as one of the leading P&C insurance providers in the Middle East North Africa (MENA) region. This is a big deal. Gulf economies, with young and growing populations, are expected to be strong growers in the coming decade. Growing economies should be good for an insurance business.

This purchase highlights a couple of strengths of Fairfax: 

• International - this has been a growing part of Fairfax’s insurance business for 20 years
• Partner with leading organizations - in this case KIPCO
• Long term focus - this transaction was incubating for 13 years

Capital allocation

 

Fairfax is earning a record amount of operating earnings in 2023 and the set-up for the next couple of years looks outstanding. What will Fairfax do with all the cash that is raining down?

 

“The best stock to buy is the one you already own.” Peter Lynch

 

The past couple of years, Fairfax has been cannibal investing (gorging) - buying significantly more of companies it already owns. GIG is the latest example of this strategy. Fairfax owned 43.7% and now they own 90%.

 

This is such a good strategy because it is very low risk. They understand GIG very well, having been closely involved with the company for the past 13 years. Fairfax is also paying up for quality (and to get control of the company).

 

Bottom line, this purchase makes Fairfax a more profitable and higher quality company.

 

 —————

 

GIG recently updated their web site. They added lots of new information. Below are links to a couple of presentations and investor relations.

 

Investor Presentation – May 2023 (short – 7 pages)

• https://www.gulfinsgroup.com/media/GIG_Investor_Presentation_2023_EN_Final.pdf

Corporate Profile

• https://www.gulfinsgroup.com/media/GIG-Corporate-Profile-ENG_D5wymRk.pdf

Investor Relations

• https://www.gulfinsgroup.com/en/investor-relations/

—————

 

In 2010, Fairfax invested $217 million for a 41.3% interest in Gulf Insurance. Fairfax partnered with KIPCO (Kuwait), the controlling shareholder of Gulf Insurance.

 

GIG became the vehicle for Fairfax to grow its insurance business in the MENA region (Middle East North Africa). The growth for the next 10 years was largely organic.

 

Late in 2020, as the world was struggling with covid, GIG opportunistically agreed to purchase the insurance operations of AXA Gulf & Yusuf Bin Ahmed Kanoo for $475 million. This purchase almost doubled the size of GIG - it was a big, bold move. Parent AXA was looking to re-build its capital levels due to losses experienced from covid. The purchase closed in Sept of 2021. Fairfax did invest new money in GIG (as did KIPCO) in 2021 to keep its ownership in GIG steady at 43.7% (not sure exactly how much they spent).

 

The shares of GIG are publicly traded on the Kuwait stock exchange. However, they are thinly traded, with KIPCO and Fairfax together owning 90%.

 

Who is KIPCO? 

 

Kuwait Projects Company (Holding) – KIPCO – is a holding company that focuses on investments in the Middle East and North Africa. It’s strategy of acquiring, building, scaling and selling companies in the MENA region has worked successfully for over 30 years.

• https://kipco.com

 —————

Historical Information

 

 

 —————

Prem’s comments about GIG from Fairfax’s 2022AR.

 

“Gulf Insurance Group had another excellent year led by CEO Khaled Saoud Al-Hasan and GIG Gulf CEO Paul Adamson. 2022, the first full year with GIG Gulf results, produced gross premiums of over $2.5 billion and a combined ratio of approximately 92%. We have a wonderful partnership with Kipco, led by CEO Sheikha Dana, in the ownership of Gulf Insurance.”

 

“Bijan (Khosrowshahi), along with Jean Cloutier, have been deeply involved with Gulf Insurance Group in the Middle East as well. After the acquisition of AXA Gulf (now GIG Gulf) in 2021, Gulf Insurance is one of the most prominent players in the region. Led by Khaled Al-Hasan, with Paul Adamson running GIG Gulf as a standalone unit, Gulf Insurance will be an increasingly important contributor to Fairfax.”

----------

From Fairfax's Q3 interim earnings report

 

Subsequent to September 30, 2023 

Acquisition of additional interest in Gulf Insurance 

 

"On April 19, 2023 the company entered into an agreement to acquire all shares of Gulf Insurance under the control of KIPCO and certain of its affiliates, representing 46.3% of the equity of Gulf Insurance. In accordance with applicable Kuwaiti regulatory requirements and the rules of the Boursa Kuwait, the exchange on which Gulf Insurance’s shares are traded, the company will pay the purchase price to KIPCO in full in Kuwaiti Dinar on closing. Pursuant to the terms of the agreement, immediately following settlement of the transaction, KIPCO shall return to the company in cash the full purchase price less an amount of Kuwaiti Dinar equal to $200.0, together with a cash payment equal to all dividends received by KIPCO from Gulf Insurance after January 1, 2023, and the company will deliver to KIPCO a payment deed of $660.0 which requires the company to make four equal annual payments of $165.0 to KIPCO beginning on the first anniversary of closing of the transaction. 

 

"The company's acquisition of all of KIPCO's shares in Gulf Insurance will be for aggregate fair valuation consideration of approximately $740 (approximately 227 million Kuwaiti Dinar), to be paid as approximately $177 in cash ($200.0 less dividends of approximately $23 received by KIPCO during the second quarter of 2023) and the fair value of approximately $563 in a payment deed. Closing of the transaction is subject to customary closing conditions, including regulatory approvals, and is expected to be in the fourth quarter of 2023. On closing of the transaction, the company's equity interest in Gulf Insurance will increase from 43.7% to a controlling interest of 90.0%. Accordingly, the company anticipates that upon closing it will consolidate the assets and liabilities of Gulf Insurance and will record a pre-tax gain of approximately $290, with changes in the company's carrying value of its equity accounted investment in Gulf Insurance up until the date of closing affecting the pre-tax gain."

 

Thanks!

[Parsad]

On 12/14/2023 at 5:29 PM, Viking said:

Earlier today, KIPCO announced the closing of the sale of their 46.3% interest in the Gulf Insurance Group (GIG) to Fairfax. Fairfax’s equity interest in GIG increased from 43.7% to a controlling interest of 90.0%.

 

Based on the financial details that were provided in Fairfax’s Q3 interim report, Fairfax is making an upfront payment of around $177 million. And then 4 equal annual payments of $165 million, beginning Dec 14, 2024.

 

“The company's acquisition of all of KIPCO's shares in Gulf Insurance will be for aggregate fair valuation consideration of approximately $740 (approximately 227 million Kuwaiti Dinar), to be paid as approximately $177 in cash ($200.0 less dividends of approximately $23 received by KIPCO during the second quarter of 2023) and the fair value of approximately $563 in a payment deed.”

 

Fairfax will book a significant gain of around $290 million when it reports Q4 results.

 

“Accordingly, the company anticipates that upon closing it will consolidate the assets and liabilities of Gulf Insurance and will record a pre-tax gain of approximately $290, with changes in the company's carrying value of its equity accounted investment in Gulf Insurance up until the date of closing affecting the pre-tax gain.”

 

This purchase will be an important growth driver for Fairfax’s results in 2024. The timing of the news is important (before year-end), so we will get more complete details of the financial impact on Fairfax when they report Q4 results in Feb 2024. Now that the deal has closed, analysts can include GIG in their estimates for Fairfax for 2024.

 

Below are highlights of GIG’s full year financial results from 2022:

• Net premiums written       $1.7 billion
• Underwriting surplus         $164 million
• Total Investments              $2.4 billion
• Shareholder’s equity          $748 milion
• Net profit                            $125 million

Some random thoughts on the GIG purchase:

• Fairfax goes from being a minority shareholder in GIG to the controlling shareholder. This is a big deal.
• Strategically, this secures Fairfax’s position as one of the leading P&C insurance providers in the Middle East North Africa (MENA) region. This is a big deal. Gulf economies, with young and growing populations, are expected to be strong growers in the coming decade. Growing economies should be good for an insurance business.

This purchase highlights a couple of strengths of Fairfax: 

• International - this has been a growing part of Fairfax’s insurance business for 20 years
• Partner with leading organizations - in this case KIPCO
• Long term focus - this transaction was incubating for 13 years

Capital allocation

 

Fairfax is earning a record amount of operating earnings in 2023 and the set-up for the next couple of years looks outstanding. What will Fairfax do with all the cash that is raining down?

 

“The best stock to buy is the one you already own.” Peter Lynch

 

The past couple of years, Fairfax has been cannibal investing (gorging) - buying significantly more of companies it already owns. GIG is the latest example of this strategy. Fairfax owned 43.7% and now they own 90%.

 

This is such a good strategy because it is very low risk. They understand GIG very well, having been closely involved with the company for the past 13 years. Fairfax is also paying up for quality (and to get control of the company).

 

Bottom line, this purchase makes Fairfax a more profitable and higher quality company.

 

 —————

 

GIG recently updated their web site. They added lots of new information. Below are links to a couple of presentations and investor relations.

 

Investor Presentation – May 2023 (short – 7 pages)

• https://www.gulfinsgroup.com/media/GIG_Investor_Presentation_2023_EN_Final.pdf

Corporate Profile

• https://www.gulfinsgroup.com/media/GIG-Corporate-Profile-ENG_D5wymRk.pdf

Investor Relations

• https://www.gulfinsgroup.com/en/investor-relations/

—————

 

In 2010, Fairfax invested $217 million for a 41.3% interest in Gulf Insurance. Fairfax partnered with KIPCO (Kuwait), the controlling shareholder of Gulf Insurance.

 

GIG became the vehicle for Fairfax to grow its insurance business in the MENA region (Middle East North Africa). The growth for the next 10 years was largely organic.

 

Late in 2020, as the world was struggling with covid, GIG opportunistically agreed to purchase the insurance operations of AXA Gulf & Yusuf Bin Ahmed Kanoo for $475 million. This purchase almost doubled the size of GIG - it was a big, bold move. Parent AXA was looking to re-build its capital levels due to losses experienced from covid. The purchase closed in Sept of 2021. Fairfax did invest new money in GIG (as did KIPCO) in 2021 to keep its ownership in GIG steady at 43.7% (not sure exactly how much they spent).

 

The shares of GIG are publicly traded on the Kuwait stock exchange. However, they are thinly traded, with KIPCO and Fairfax together owning 90%.

 

Who is KIPCO? 

 

Kuwait Projects Company (Holding) – KIPCO – is a holding company that focuses on investments in the Middle East and North Africa. It’s strategy of acquiring, building, scaling and selling companies in the MENA region has worked successfully for over 30 years.

• https://kipco.com

 —————

Historical Information

 

 

 —————

Prem’s comments about GIG from Fairfax’s 2022AR.

 

“Gulf Insurance Group had another excellent year led by CEO Khaled Saoud Al-Hasan and GIG Gulf CEO Paul Adamson. 2022, the first full year with GIG Gulf results, produced gross premiums of over $2.5 billion and a combined ratio of approximately 92%. We have a wonderful partnership with Kipco, led by CEO Sheikha Dana, in the ownership of Gulf Insurance.”

 

“Bijan (Khosrowshahi), along with Jean Cloutier, have been deeply involved with Gulf Insurance Group in the Middle East as well. After the acquisition of AXA Gulf (now GIG Gulf) in 2021, Gulf Insurance is one of the most prominent players in the region. Led by Khaled Al-Hasan, with Paul Adamson running GIG Gulf as a standalone unit, Gulf Insurance will be an increasingly important contributor to Fairfax.”

----------

From Fairfax's Q3 interim earnings report

 

Subsequent to September 30, 2023 

Acquisition of additional interest in Gulf Insurance 

 

"On April 19, 2023 the company entered into an agreement to acquire all shares of Gulf Insurance under the control of KIPCO and certain of its affiliates, representing 46.3% of the equity of Gulf Insurance. In accordance with applicable Kuwaiti regulatory requirements and the rules of the Boursa Kuwait, the exchange on which Gulf Insurance’s shares are traded, the company will pay the purchase price to KIPCO in full in Kuwaiti Dinar on closing. Pursuant to the terms of the agreement, immediately following settlement of the transaction, KIPCO shall return to the company in cash the full purchase price less an amount of Kuwaiti Dinar equal to $200.0, together with a cash payment equal to all dividends received by KIPCO from Gulf Insurance after January 1, 2023, and the company will deliver to KIPCO a payment deed of $660.0 which requires the company to make four equal annual payments of $165.0 to KIPCO beginning on the first anniversary of closing of the transaction. 

 

"The company's acquisition of all of KIPCO's shares in Gulf Insurance will be for aggregate fair valuation consideration of approximately $740 (approximately 227 million Kuwaiti Dinar), to be paid as approximately $177 in cash ($200.0 less dividends of approximately $23 received by KIPCO during the second quarter of 2023) and the fair value of approximately $563 in a payment deed. Closing of the transaction is subject to customary closing conditions, including regulatory approvals, and is expected to be in the fourth quarter of 2023. On closing of the transaction, the company's equity interest in Gulf Insurance will increase from 43.7% to a controlling interest of 90.0%. Accordingly, the company anticipates that upon closing it will consolidate the assets and liabilities of Gulf Insurance and will record a pre-tax gain of approximately $290, with changes in the company's carrying value of its equity accounted investment in Gulf Insurance up until the date of closing affecting the pre-tax gain."

 

Great analysis Viking!  Cheers!

[Viking]

Below is an update to my 3-year earnings estimate for Fairfax.

 

What line item in my full year earnings forecast for 2023 do you think I am most wrong with? Why? 2024? I do appreciate feedback (and I have thick skin). So please provide your comments! 

 

Please note, forecasts are a guess at a point in time. To state the obvious, things are constantly changing (and I am still learning about lots of stuff). As a result, my earnings forecasts quickly become outdated – and my frequent updates change quite a bit. These updates are intended solely for entertainment purposes – please keep this in mind. 

 

 Since my last earnings update, below is a recap of a number of important developments: 

• Fairfax reported Q3 results (and held a conference call) – which provided us with lots of new information.
• Interest rates, especially longer-dated, have moved significantly lower in November and December. This will impact Fairfax’s reported results:
  • the $41 billion fixed income portfolio – a big tailwind?
  • the ‘Effects of discounting and risk adjustment – IFRS’ bucket – a big headwind?
• On the Q3 conference call, Prem said Fairfax extended the average duration of their fixed income portfolio to 3.1 years in October (right before the plunge in yields). This could be another tailwind for the fixed income portfolio. But to do this, did Fairfax sell significant amounts of shorter dated bonds at a loss (as happened in Q1 when they aggressively extended duration)? If so, this part would be a headwind.
• On December 14, KIPCO communicated the GIG acquisition has closed. Fairfax previously reported they expected this to result in a realized gain of about $290 million which we should see in Q4 results. What other impacts will the GIG transaction closing have on Fairfax’s balance sheet and year-end results?  

 

Summary

 

My current estimate is Fairfax will earn about $170/share in 2023 and about $155/share in both 2024 and 2025.

 

 

What could we see for EPS in Q4?

 

Reported earnings to September 30, 2023 was $120/share. If Fairfax finished the year at $170/share that would put Q4 earnings at $50/share. 

 

2023-2025 Forecast

 

A hard piece to forecast with Fairfax is capital allocation. Fairfax is generating a significant amount of earnings. But we don’t know today how the future cash flows will be invested. Looking at the last 5 years, the management team has done an outstanding job at capital allocation. My guess is they will continue to make good decisions (on balance) and this will benefit shareholders – likely providing a tailwind to my forecasts for 2024 and 2025.

 

I am assuming interest rates remain roughly at current levels (at Dec 15, 2023). Of course, this will not be the case.

 

Below is an 8-year snapshot for Fairfax. It communicates in a concise manner the dramatic transformation that has happened at this company, beginning around 2021. Look at the trend in operating income per share – it has increased from $48/share in 2018 to an estimated $190/share in 2023. The higher amount is looking like the new baseline for the company. It is a pretty amazing story. 

 

Fairfax today is like a phoenix, rising from the ashes of its past, renewed and stronger.

 

 

What are the key assumptions?

 

1.) underwriting profit: Estimated to increase to a record $1.4 billion in 2023.

• Although slowing, it appears the hard market will continue into 2024. This should support mid-single digit organic growth.
• The Gulf Insurance Group (GIG) acquisition should add about $1.7 billion to net written premiums.
• Between organic growth and GIG, low double digit growth in net premiums written seems reasonable for 2024.
• Combined ratio (CR) forcasts:
  • Full year 2023 = 94%. (YTD to Sept 30, it is at 94.3%)
  • 2024 = 95%
  • 2025 = 95.5%
  • I am assuming a ‘normal/historical’ level of catastrophe losses in both 2024 and 2025.

2.) interest and dividend income: Estimated to increase to a record $1.9 billion in 2023.

• Interest rate pickup (re-investing maturing bonds): will this become a headwind in 2024?
• New business: starting in Q3, 2023, the $2 billion PacWest real estate loans started delivering incremental interest income; this should be a tailwind for 12 months. It was reported by Kennedy Wilson in December 2023 that Fairfax increased its commitment to the KW real estate debt platform by another $2 billion which suggests we could see a further pickup in yield in 2024.
• GIG should add about $2.4 billion to the total investment portfolio. Big tailwind for 2024.
• Eurobank: the plan is to start paying a dividend in 2024. If this happens, we should see a nice increase in dividend income.
• The path of interest rates will be key. Aggressive interest rate cuts from global central banks in 2024 would be a headwind to interest income later in the year.

3.) Share of profit of associates: Estimated to increase to a record $1.1 billion in 2023.

• Earnings at Eurobank, Poseidon, EXCO, Stelco and Fairfax India, in aggregate, should continue to grow nicely. Poseidon (interest expense) and EXCO (nat gas prices) could be headwinds.
• 2023 headwind: Resolute Forest Products was sold earlier in 2023. It contributed $159 million in 2022, which I have removed from my 2023 forecast.
• 2024 headwind: I estimate GIG will contribute $70 million in 2023. To reflect the GIG transaction, I removed $70 million from my 2024 estimate.

4.) Effects of discounting and risk adjustment (IFRS 17).

• The two key drivers for this bucket are the trend in net written premiums of the insurance business and changes in interest rates.
• Net written premiums should continue to grow around 7% in Q4 and should be a tailwind. For 2024, organic growth and the GIG acquisition should provide a nice tailwind.
• Interest rates further out on the curve have declined substantially in Q4. If interest rates hold at current levels into year-end, then this bucket could give back a chunk its gains from the first 9 months. How much? No idea.
• I have modelled a decline from the Q3-YTD number, but I really have no idea how all the puts and take will shake out for this bucket.

5.) Life insurance and runoff:

• This combination of businesses lost $167 million in 2022. This bucket is forecasted to lose $250 million in 2023 (it was at a loss of about $146 million at Sept YTD).
• Life insurance is likely a tailwind and runoff is likely a big headwind.

6.) Other (revenue-expenses) - Non-insurance subsidiaries: Results from consolidated holdings are estimated to finish 2023 at $100 million.

• Includes Recipe, Dexterra, AGT, Grivalia Hospitality, Boat Rocker, Farmers Edge etc.  
• Do we get small write downs from both Boat Rocker and Farmers Edge? 
• This bucket is poised to grow nicely for Fairfax in the coming years. It could surprise to the upside. Yes, the results will be lumpy.

7.) Interest expense: A slight increase to the current run rate.

8.) Corporate overhead and other: A slight increase to the current run rate.

 

9.) Net gains on investments: Estimated to finish around $900 million in 2023.

• Given the significant drop in interest rates, unrealized gains in the fixed income portfolio could be a big tailwind in Q4. To move to 3.1 years average duration in October, did Fairfax sell a bunch of short-dated bonds at a loss? If so, this part would be a headwind.
• As of Dec 15, equities should be a tailwind.

 

My estimates for 2024 ($1 billion) and 2025 ($1.1 billion) assume (this is very general):

• Mark-to-market equity holdings of about $8 billion increase in value by 10% per year, or $800 million. I include the total return swap of 1.96 million Fairfax shares here; as a reminder, every $100 increase in Fairfax’s share price results in a $200 million gain.  
• A small bump of $200 million per year from additional gains (equities and fixed income). 

10.) Gain on sale/deconsol of insurance sub: This is where I put the large asset sales. In 2022, it was the sale of pet insurance business for $1.4 billion. In 2023, it is:

• Ambridge sale: closed May 10, 2023 and resulted in a pre-tax gain of $259.1 million.  
• GIG acquisition: KIPCO reported the deal closed Dec 14. Fairfax previously communicated they will likely record a pre-tax gain of about $290 million. 

Moving forward, this bucket is a wild card. 

• For 2024 and 2025, I estimate no gains from asset sales/write up of assets. I think this is highly unlikely – my guess is Fairfax will continue to surface value in its vast $57 billion investment portfolio/collection of assets:
• Perhaps we get a Digit IPO.
• Perhaps Fairfax sells another holding for a large gain.

Developments here will be incremental to my earnings estimates - and a big reason why I feel my estimates for 2024 and 2025 could prove to be conservative. 

 

11.) Income taxes: estimated at 19% (historical average rate)

12.) Non-controlling interests: estimated at 11% (historical average rate)

 

13.) Shares Outstanding: Estimated that effective shares outstanding will be reduced by 300,000 shares per year for each of 2023, 2024 and 2025. Fairfax reduced their share count over the first 9 months of 2023 by a little over 200,000 so my guess is they will finish this year around 300,000. 

 

In recent years, Fairfax has been much more aggressive on the share buyback front. This will be something to monitor moving forward.

 

Notes:

• ‘Underwriting profit’: Includes insurance and reinsurance; does not include runoff or Eurolife life insurance.
• ‘Interest and dividends’ and ‘share of profit of associates’: Includes insurance, reinsurance and runoff.

—————

Return on Equity Calculation

 

Return on equity (ROE) is calculated below using ‘average equity’ which is:

• (PY ending BV/share + CY ending BV/share) / 2

I think most of the industry (other P/C insurance companies, analysts) calculate ROE using an average number for equity. So, this likely makes my estimates more comparable with industry numbers.

 

My current earnings estimate has Fairfax achieving an ROE of 20.2% for 2023. Outstanding. And much better than the average of 10.1% that Fairfax delivered from 2018-2022. 

Edited December 17, 2023 by Viking

[Haryana]

On 12/14/2023 at 5:29 PM, Viking said:

 

Fairfax will book a significant gain of around $290 million when it reports Q4 results.

 

 

 

5 hours ago, Viking said:

Fairfax previously reported they expected this to result in a realized gain of about $290 million which we should not see in Q4 results.

 

With regards to whether they will book the GIG gain in Q4,

 

they should or should not?

 

Thanks.

 

[Viking]

2 hours ago, Haryana said:

 

 

With regards to whether they will book the GIG gain in Q4,

 

they should or should not?

 

Thanks.

 

 

@Haryana thanks for pointing out my error. I have corrected my post above. Assuming the news Dec 14 from KIPCO is accurate (and the GIG deal has been approved/has closed), it looks to me like Fairfax should be booking a gain of about $290 million in Q4.

[Haryana]

 

Thank you for your great analysis.

 

Net earnings in Q3 was over a billion.

 

Income in Q4 is likely to be higher in each of Insurance, Interest and Investments.

 

This makes me guess Q4 earnings to be over 1.5 billion after adding ~300mm for GIG. 

 

Thus earnings per share in Q4 could be about 65/share taking the 2023 total to 185/share.

 

Looking forward to annual earnings of about 200/share to get normalized over the coming years.

 

Certainly, there will be lumpiness but how about we project 1000/share of earnings over five year periods.

 

This fits in well as quick mental model to get a double every 5 years and you are getting annual return of 15%.

 

[petec]

Apologies if this has been discussed upthread, but how do people feel about Fairfax at USD900 if rates fall from here?

 

In my view rising rates have been the most significant driver of earnings over the last few years. I do not mean to detract from all the other good things that have happened, but higher earnings on the bond portfolio AND premium growth AND lower combined ratios have transformed operating earnings. All three are largely driven by rates: bond earnings obviously are, and I suspect premium growth and lower CRs are too since rates drive tourist capital in and out of the industry.

 

If so, then a return to significantly lower rates would cause operating earnings to drop back down, possibly significantly. The next 3 years of earnings are somewhat locked in (especially in bonds) but the three years after that could look very different. Book value will probably be in the $1300 range by then, but the stock has clearly traded below book when interest rates are low.

 

How does the stock react if the 10y goes back to say 2% over the next year or two (regardless of how likely you think that is)?

 

 

[hardcorevalue]

well locking in the duration is locking in a big part of the market cap in terms of earnings so it’s still really cheap regardless of if we get back to 2%. Also, call me crazy but I still believe in higher for longer, 7% US deficits aren’t sustainable, especially with the obligations the US has. 

 

[MMM20]

5 hours ago, petec said:

Apologies if this has been discussed upthread, but how do people feel about Fairfax at USD900 if rates fall from here?

 

In my view rising rates have been the most significant driver of earnings over the last few years. I do not mean to detract from all the other good things that have happened, but higher earnings on the bond portfolio AND premium growth AND lower combined ratios have transformed operating earnings. All three are largely driven by rates: bond earnings obviously are, and I suspect premium growth and lower CRs are too since rates drive tourist capital in and out of the industry.

 

If so, then a return to significantly lower rates would cause operating earnings to drop back down, possibly significantly. The next 3 years of earnings are somewhat locked in (especially in bonds) but the three years after that could look very different. Book value will probably be in the $1300 range by then, but the stock has clearly traded below book when interest rates are low.

 

How does the stock react if the 10y goes back to say 2% over the next year or two (regardless of how likely you think that is)?

 

 

 

You can argue that earnings in the out years would be lower (I'm skeptical) but don't forget that the fair multiple of those earnings would be higher - holding ERP constant at least.

 

Edited December 19, 2023 by MMM20

[Tommm50]

5 hours ago, petec said:

All three are largely driven by rates: bond earnings obviously are, and I suspect premium growth and lower CRs are too since rates drive tourist capital in and out of the industry.

 

I don't believe lower CR's are driven by higher interest rates, if fact, the opposite. If an insurance company is not making income on the investment side it is forced to try to make it on the underwriting side i.e. lower CR's. I'm not sure the relationship to growth but growth is not as important as profit.

[TwoCitiesCapital]

5 hours ago, petec said:

Apologies if this has been discussed upthread, but how do people feel about Fairfax at USD900 if rates fall from here?

 

In my view rising rates have been the most significant driver of earnings over the last few years. I do not mean to detract from all the other good things that have happened, but higher earnings on the bond portfolio AND premium growth AND lower combined ratios have transformed operating earnings. All three are largely driven by rates: bond earnings obviously are, and I suspect premium growth and lower CRs are too since rates drive tourist capital in and out of the industry.

 

If so, then a return to significantly lower rates would cause operating earnings to drop back down, possibly significantly. The next 3 years of earnings are somewhat locked in (especially in bonds) but the three years after that could look very different. Book value will probably be in the $1300 range by then, but the stock has clearly traded below book when interest rates are low.

 

How does the stock react if the 10y goes back to say 2% over the next year or two (regardless of how likely you think that is)?

 

 

 

You could make a case for either direction. Honestly, itl don't have a strong opinion one way or the other. 2018 might be instructive where it was expensive given its earnings power potential while interest rates were low. I made the case back then that I saw limited path for it to generate decent returns from $550 USD/share without a significant rise in rates which wasn't in the cards then.

 

Hindsight was that turned out to be right in the short term - the stock suffered massively through covid and then was very slow to recover. But even if you'd bought it in 2018, you did alright - primarily because things like GoDigit worked out extraordinarily well in generating BV returns even while interest rates were low. 

 

1 hour ago, hardcorevalue said:

well locking in the duration is locking in a big part of the market cap in terms of earnings so it’s still really cheap regardless of if we get back to 2%. Also, call me crazy but I still believe in higher for longer, 7% US deficits aren’t sustainable, especially with the obligations the US has. 

 

+1 

 

That's why I've been such an advocate for them locking in and not trying to call the top. Having the foresight of 1+ billion in interest income is going to be huge regardless of what rates do. Unfortunately, it seems the Fed was just jawboning the "higher for longer" mantra - but now that Fairfax has ~3 years to maturity on most of its bonds we can wait out a turn on the credit cycle. Won't make a killing on duration most likely, but will have plenty of interest income to reinvest to make a difference. 

 

They missed the prior turn in 2018 and we sat for 3-4 years at basically 0 interest in response (in addition to the (1-2 years we already sat there pre-2018 waiting through the hiking cycle). Just glad we're not going to do that again! 

Edited December 19, 2023 by TwoCitiesCapital

[Thrifty3000]

5 hours ago, petec said:

Apologies if this has been discussed upthread, but how do people feel about Fairfax at USD900 if rates fall from here?

 

In my view rising rates have been the most significant driver of earnings over the last few years. I do not mean to detract from all the other good things that have happened, but higher earnings on the bond portfolio AND premium growth AND lower combined ratios have transformed operating earnings. All three are largely driven by rates: bond earnings obviously are, and I suspect premium growth and lower CRs are too since rates drive tourist capital in and out of the industry.

 

If so, then a return to significantly lower rates would cause operating earnings to drop back down, possibly significantly. The next 3 years of earnings are somewhat locked in (especially in bonds) but the three years after that could look very different. Book value will probably be in the $1300 range by then, but the stock has clearly traded below book when interest rates are low.

 

How does the stock react if the 10y goes back to say 2% over the next year or two (regardless of how likely you think that is)?

 

 

The investment portfolio will probably be closing in on $70 bil in 3 years. Bonds and cash will probably make up 60% of the portfolio. A blended 4.5% return, or $3.2 bil, should net around $100 per share.

 

If the bonds are only earning 2% then the rest of the portfolio has to earn 8% to maintain the $100 per share bogey. I don’t think that’s too big of a hurdle for the investment team.

 

I also think if interest rates are 2% that it’s not far-fetched to assume sub-100 combined ratios, which should help FFH stay in the neighborhood of $150 EPS through the cycle.  

[Crip1]

34 minutes ago, Thrifty3000 said:

The investment portfolio will probably be closing in on $70 bil in 3 years. Bonds and cash will probably make up 60% of the portfolio. A blended 4.5% return, or $3.2 bil, should net around $100 per share.

 

If the bonds are only earning 2% then the rest of the portfolio has to earn 8% to maintain the $100 per share bogey. I don’t think that’s too big of a hurdle for the investment team.

 

I also think if interest rates are 2% that it’s not far-fetched to assume sub-100 combined ratios, which should help FFH stay in the neighborhood of $150 EPS through the cycle.  

In addition to the previously discussed dynamics, all of which are relevant, one should consider the anticipated Fairfax “pivot”. For years they have almost exclusively been in very safe US Treasuries because the spread between treasury and corporate rates has not been sufficient relative to the risk. At some point, presumably, that’s going to change and they’re going to, likely selectively, shift a portion of their FI investments to Corporates which will presumably generate higher yields, offsetting a declining rate environment.

 

Somewhat separately, all of the posts over the past couple of days illustrate and validate Viking’s consistent assertions that he’s not going to project out more than 2-3 years since there are so many variables at play. He’s right. The returns over the next couple of years are not guaranteed, but the $150/Year for the next couple of years looks to be reasonable. From 2026 forward, we’re only guessing. What we do know is that they will be playing from a position of strength with a VERY large balance sheet, a solid insurance operation and a demonstrated acumen in asset allocation. As an investor, I like my chances at that point.

 

-Crip
 

[Thrifty3000]

7 hours ago, petec said:

Apologies if this has been discussed upthread, but how do people feel about Fairfax at USD900 if rates fall from here?

 

In my view rising rates have been the most significant driver of earnings over the last few years. I do not mean to detract from all the other good things that have happened, but higher earnings on the bond portfolio AND premium growth AND lower combined ratios have transformed operating earnings. All three are largely driven by rates: bond earnings obviously are, and I suspect premium growth and lower CRs are too since rates drive tourist capital in and out of the industry.

 

If so, then a return to significantly lower rates would cause operating earnings to drop back down, possibly significantly. The next 3 years of earnings are somewhat locked in (especially in bonds) but the three years after that could look very different. Book value will probably be in the $1300 range by then, but the stock has clearly traded below book when interest rates are low.

 

How does the stock react if the 10y goes back to say 2% over the next year or two (regardless of how likely you think that is)?

 

 

 

If you want a doomsday scenario where cash and bonds collectively earn less than 1%, and the rest of the portfolio earns less than 8%, you're looking at EPS in the neighborhood of $90 pre-tax. After taxes and overhead/expenses would put it around $40 EPS.

 

Add or subtract what you want for insurance earnings. I'd expect at least $25 to $50 EPS in that type of rate environment.

[Thrifty3000]

Here is a historical chart showing average portfolio returns:

 

Edited December 19, 2023 by Thrifty3000

[Thrifty3000]

2 hours ago, Thrifty3000 said:

Here is a historical chart showing average portfolio returns:

 

 

From 2011-2016 5-year treasuries yielded around 1.5%, and the portfolio only yielded 2.3% because of the equity hedges.

 

From 2017-2022 5-year treasuries were extremely volatile, but appear to have averaged around a 1.75% yield. However, the portfolio returned 4.8% thanks to the equities, etc.

 

I think the last decade shows us that a 4.5%+ portfolio return is reasonably achievable even in an environment with sub 2% treasury yields.

 

Therefore, $100+ per share portfolio earnings (after taxes/expenses) seems plenty reasonable 4 years from now and beyond.

Edited December 19, 2023 by Thrifty3000

[Xerxes]

1 hour ago, Thrifty3000 said:

 

From 2011-2016 5-year treasuries yielded around 1.5%, and the portfolio only yielded 2.3% because of the equity hedges.

 

From 2017-2022 5-year treasuries were extremely volatile, but appear to have averaged around a 1.75% yield. However, the portfolio returned 4.8% thanks to the equities, etc.

 

I think the last decade shows us that a 4.5%+ portfolio return is reasonably achievable even in an environment with sub 2% treasury yields.

 

Therefore, $100+ per share portfolio earnings (after taxes/expenses) seems plenty reasonable 4 years from now and beyond.

The whole “not locking in duration” decision also had an impact on market share that FFH could grab at the right time as its peers got walloped. 
 

Would that increase in market share show up anywhere other than now larger pool of gross insurance premiums. 
 

Is there a positive scale factor in for such a non-centralized entity ?