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Posted (edited)

@Viking

 

What I'm most worried about as I plan to hold FFH indefinitely (absent an overnight 3x spike 🙂) is related to #5. Are we heading for an ugly "Succession"-like scenario if Prem doesnt end up with, let's say, the intellectual longevity of a Buffett/Munger, but others at Fairfax don't actually have the power to force a change? 

 

Maybe FFH buys back enough stock for Prem to regain majority voting control and just never gives up the reins, even if he should. Shareholders might be blind to this sort of dynamic for a while b/c the shareholder communication (while recently improved IMHO) is always been a bit awkward and fumbling, the letters somewhat disorganized and rambling compared to a BRK or a MKL.

 

Will the top executives actually stick around if Prem's still in his seat 5-10 years from now, even if he continues to delegate various responsibilities? Maybe a bunch of those folks will get picked off by competitors and slowly erode FFH's talent base as the strong recent performance becomes clear to the market.

 

I really don't think we'll end up with a senile shell of Prem and and some weak puppet successor slowly running FFH into the ground, but hopefully you get my point.

 

Anyway, another great post...thanks @Vikingfor sharing so much of your work.

 

 

Edited by MMM20
Posted
On 5/4/2023 at 8:41 AM, MMM20 said:

@Viking

 

What I'm most worried about as I plan to hold FFH indefinitely (absent an overnight 3x spike 🙂) is related to #5. Are we heading for an ugly "Succession"-like scenario if Prem doesnt end up with, let's say, the intellectual longevity of a Buffett/Munger, but others at Fairfax don't actually have the power to force a change? 

 

Maybe FFH buys back enough stock for Prem to regain majority voting control and just never gives up the reins, even if he should. Shareholders might be blind to this sort of dynamic for a while b/c the shareholder communication (while recently improved IMHO) is always been a bit awkward and fumbling, the letters somewhat disorganized and rambling compared to a BRK or a MKL.

 

Will the top executives actually stick around if Prem's still in his seat 5-10 years from now, even if he continues to delegate various responsibilities? Maybe a bunch of those folks will get picked off by competitors and slowly erode FFH's talent base as the strong recent performance becomes clear to the market.

 

I really don't think we'll end up with a senile shell of Prem and and some weak puppet successor slowly running FFH into the ground, but hopefully you get my point.

 

Anyway, another great post...thanks @Vikingfor sharing so much of your work.

 

 

 

Remember, Carol Loomis who is a great writer, edits the BRK annual letter.  I don't think Prem uses anyone. 

 

Prem has also always operated FFH as a team led company...succession planning was always at the forefront.  BRK was really a one-man show until recent history where the two T's were hired and Ajit/Abel started sitting in on the AGM.

 

If you've heard Buffett speak at the AGM, he can ramble.  Now Munger...as concise as one can get...and I bet he doesn't use an editor for any letters he writes! 

 

Hopefully both Prem and Buffett have the mental acuity of Munger at his age!  🙂 

 

Cheers!

Posted

Ajit Jain in the BRK Q&A (morning session) said that BRK has written 50% more P/C business than 5-6 months ago, because pricing became much more attractive since December renewals, which were disappointing.  

 

I would imagine Fairfax continued writing business and growing their insurance subs in the 2nd quarter.

 

Cheers!

Posted (edited)

Buffett again today talked about the superiority of float when it is cost free (or negative cost). It can't disappear in a hurry and it finances the asset side in the same way as costly equity or debt.
 

Berkshire has $165 billion of float vs just shy of $1T in assets = ~17%. Fairfax has ~$30B of float vs ~$60B in assets = ~50%. 
 

I’m not normally a bold/underline guy but FFH has ~3x the float of BRK, adjusted for size.

Much of BRK’s outperformance during Buffett’s early/middle decades was a direct result of zero cost float leverage. This is not a knock on Buffett as recognizing this dynamic decades ahead of the crowd was probably his biggest stroke of genius.
 

For FFH, float has become a huge and still misunderstood / undervalued structural advantage. Float growth driven by well-timed acquisitions ahead of the recent hard market has been incredible, to echo @Viking. As a result, FFH going forward should generate mid-teens shareholder returns — so an expected return of a double every ~5-6 years on average, even if zero multiple expansion — with only decent mid-high single digit investment returns.


Ok, I’m a broken record 🙂
 

Edited by MMM20
Posted
1 hour ago, MMM20 said:

Buffett again today talked about the superiority of float when it is cost free (or negative cost). It can't disappear in a hurry and it finances the asset side in the same way as costly equity or debt.
 

Berkshire has $165 billion of float vs just shy of $1T in assets = ~17%. Fairfax has ~$30B of float vs ~$60B in assets = ~50%. 
 

I’m not normally a bold/underline guy but FFH has ~3x the float of BRK, adjusted for size.

Much of BRK’s outperformance during Buffett’s early/middle decades was a direct result of zero cost float leverage. This is not a knock on Buffett as recognizing this dynamic decades ahead of the crowd was probably his biggest stroke of genius.
 

For FFH, float has become a huge and still misunderstood / undervalued structural advantage. Float growth driven by well-timed acquisitions ahead of the recent hard market has been incredible, to echo @Viking. As a result, FFH going forward should generate mid-teens shareholder returns — so an expected return of a double every ~5-6 years on average, even if zero multiple expansion — with only decent mid-high single digit investment returns.


Ok, I’m a broken record 🙂
 


A decade of low interest rates was enough time for people or at least prospective Fairfax investors to forget how valuable float is.  I think Buffett has said that a good proxy for intrinsic value is book value plus float. BRK.B actually trades close to that while Fairfax’s market cap is about a third of that IV estimate.

Posted

With Fairfax Q1 earnings coming on Thursday I thought it would be good as a primer to post an update to my last estimate (April 2). 

----------

The big change that will happen in Q1 is the move to IFRS-17 accounting. Fairfax said that reported BV at Dec 31, 2022, will be increasing by $94/share. It will likely take a couple of quarters of results to better understand how IFRS-17 impacts Fairfax's reported results.  

----------

My comments below are NOT including any changes resulting from the move to IFRS-17.

 

My guess is Fairfax will earn about $37/share in Q1. That would put March 31 book value at US$685 = $658 + $37 - $10 div. Shares are trading today at $694 = 1 x BV. 

 

Fairfax will see about a $300 million gain in the market value of its associate common stock holdings (equity accounted) in Q1. This will put the market value of associate holdings at about $575 million over carrying value (about $25/share pre-tax). This is not captured in book value.

 

The sale of Ambridge did not happen in Q1. When this sale closes, likely in Q2, Fairfax will book a $275 million pre-tax gain (about $10/share after tax).

 

I am not expecting much in the way of share buybacks in Q1. The dividend is paid in Q1 and this is about a $250 million use of cash (common and preferred). Fairfax is now generating significant cash flow in underwriting profit and interest and dividend income each quarter (est $700 million in Q1). The sale of Resolute for $625 million also closed in Q1. The sale of Ambridge will bring in more ($275 million cash and $125 million promissory note). It will be interesting to see what Fairfax does with the all the cash moving forward.

 

When I weave it all together: Fairfax looks poised to report a very good Q1. More importantly, 'the story' at Fairfax continues to get better.

 

Shares continue to look cheap. My current estimate is Fairfax will earn about $122/share in 2023 = P/E of 5.7 ($694/$122). My 2023 year-end BV estimate is $770 = forward P/BV multiple = 0.90 

 

image.thumb.png.60e4224e5afb59515837ec6dde1b8e3d.png

 

Assumptions:

1.     Underwriting profit = $330 million = flat to PY. My guess is net premiums earned will come in +10% to PY. CR will be a little higher than 2022 (when it was a stellar 93.1). 

2.     Interest and dividends = $350 million. Q4 2022 came in at $314 million. Fairfax said current run rate is $1.5 billion per year.

3.     Share of profit of associates = $200 million. Slightly higher than PY.

4.     Life ins & run-off = - $25 million. A little more than PY.

5.     Other (revenue - expenses) = $50 million. Expect increase in ownership of Recipe to start to move the needle here in 2023.

6.     Interest expense = $125 million. Same as Q4, 2022.

7.     Corporate overhead = - $80 million. Same as PY. (no idea)

8.     Net gains = $500 million. Equity gains = $375-$400 and bond gains = $100-$150 million. Mostly unrealized. 

9.     Income taxes = - $228 million. 19%? Guess.

10.  Non-controlling interest = $110 million? Guess.

 

Posted

After lurking for years reading this forum, I'm jumping in real quick to plug the write-up I posted today on Fairfax. There isn't much new under the sun than what's already been said here (any one of you seems to know loads more than I do) but it may help you tie things together. Also, my working model is available for download at the bottom of the post. Feel free to change it around based on your own assumptions.

 

Fairfax Financial: No Clues from the Past

Posted (edited)

@OliverSung Don’t sell yourself short. All-time great first post. I’ve been a fan of your work for years but must’ve dropped off your list when I switched jobs, so thanks for sharing!

 

A few of my favorite parts:

 

“While everyone ran around discussing whether Prem and co had lost their magic touch, Fairfax’s insurance group marched ahead in the background to build a track record of growth that would put it on par with a thriving tech company.”
 

“A $55.5bln investment portfolio, roughly half of which is financed by 5% negative-interest float (Fairfax’s current 95% combined ratio) is coiled to churn out vastly different earnings numbers in a higher-interest environment than Fairfax has ever witnessed. Due to this humongous increase in cash-making float, Fairfax is in another form than it’s ever been and the company’s past history gives poor clues as to how it may perform in the future”

 

”Family-controlled insurers are, ceteris paribus, better positioned for opportunism on the investment side. The result? As Fairfax slowly ramped up the duration in conjunction with rising interest rates, it took its run rate of $530mln in interests and dividends and tripled it to a current run rate of $1.5bln which now approaches a three-year duration. I’ve heard a lot of Fairfaxers are disappointed about Fairfax not extending those durations further but I don’t see why Hamblin Watsa would settle for 3-4% when they have lots of other options, including writing >7% mortgages with Kennedy Wilson at average three-year terms. Cash and cheap stocks may also be better options as of now.”

 

Edited by MMM20
Posted
22 hours ago, Viking said:

 

With Fairfax Q1 earnings coming on Thursday I thought it would be good as a primer to post an update to my last estimate (April 2). 

----------

The big change that will happen in Q1 is the move to IFRS-17 accounting. Fairfax said that reported BV at Dec 31, 2022, will be increasing by $94/share. It will likely take a couple of quarters of results to better understand how IFRS-17 impacts Fairfax's reported results.  

----------

My comments below are NOT including any changes resulting from the move to IFRS-17.

 

My guess is Fairfax will earn about $37/share in Q1. That would put March 31 book value at US$685 = $658 + $37 - $10 div. Shares are trading today at $694 = 1 x BV. 

 

Fairfax will see about a $300 million gain in the market value of its associate common stock holdings (equity accounted) in Q1. This will put the market value of associate holdings at about $575 million over carrying value (about $25/share pre-tax). This is not captured in book value.

 

The sale of Ambridge did not happen in Q1. When this sale closes, likely in Q2, Fairfax will book a $275 million pre-tax gain (about $10/share after tax).

 

I am not expecting much in the way of share buybacks in Q1. The dividend is paid in Q1 and this is about a $250 million use of cash (common and preferred). Fairfax is now generating significant cash flow in underwriting profit and interest and dividend income each quarter (est $700 million in Q1). The sale of Resolute for $625 million also closed in Q1. The sale of Ambridge will bring in more ($275 million cash and $125 million promissory note). It will be interesting to see what Fairfax does with the all the cash moving forward.

 

When I weave it all together: Fairfax looks poised to report a very good Q1. More importantly, 'the story' at Fairfax continues to get better.

 

Shares continue to look cheap. My current estimate is Fairfax will earn about $122/share in 2023 = P/E of 5.7 ($694/$122). My 2023 year-end BV estimate is $770 = forward P/BV multiple = 0.90 

 

image.thumb.png.60e4224e5afb59515837ec6dde1b8e3d.png

 

Assumptions:

1.     Underwriting profit = $330 million = flat to PY. My guess is net premiums earned will come in +10% to PY. CR will be a little higher than 2022 (when it was a stellar 93.1). 

2.     Interest and dividends = $350 million. Q4 2022 came in at $314 million. Fairfax said current run rate is $1.5 billion per year.

3.     Share of profit of associates = $200 million. Slightly higher than PY.

4.     Life ins & run-off = - $25 million. A little more than PY.

5.     Other (revenue - expenses) = $50 million. Expect increase in ownership of Recipe to start to move the needle here in 2023.

6.     Interest expense = $125 million. Same as Q4, 2022.

7.     Corporate overhead = - $80 million. Same as PY. (no idea)

8.     Net gains = $500 million. Equity gains = $375-$400 and bond gains = $100-$150 million. Mostly unrealized. 

9.     Income taxes = - $228 million. 19%? Guess.

10.  Non-controlling interest = $110 million? Guess.


With the Fairfax Q1 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? Over or under 10%?

what increases is reinsurance seeing? Especially at Odyssey?

2.) what is the CR? Over or under 95? 
- some insurers are reporting elevated cat losses in Q1 compared to PY.

3.) update on hard market. What is outlook for 2023?


Fixed income portfolio

4.) what kind of increase do we see in interest income? What is new run rate for interest and dividend income? 

- Run rate was $950 million end of Q2, $1.2 billion the end of Q3 and $1.5 billion the end of Q4.

5.) did average duration of bond portfolio get pushed out closer to 2 years?

- 1.2 years at end of Q2 and 1.6 years at end of Q4.

- this is a big deal. If Fairfax is able to push duration out to 2 (or more) years then investors will get more comfortable that $1.5 billion will be durable for years. That could be a game changer for Fairfax - that should lead to multiple expansion.

6.) given fall in interest rates in March, do we see mark to market gains in fixed income?

- if duration was pushed out in Q1 then this could be a big number (given how much rates came down in March).

 

Equity Portfolio 

7.) what is amount of mark to market gain? 

8.) Resolute closed in Q1. Proceeds were $625 million. Will be used for?

 

Other

9.) share of profits of associates?

10.) Book value?

11.) share buybacks during quarter?

12.) what is net debt?

13.) capital allocation priority moving forward?

 

Updates/Commentary:
14.) Ambridge Partners: $400 million sale. On track?

15.) GIG purchase of Kipco’s 46% stake: timing on close?

16.) Digit IPO: timing update?

—————

I am estimating Fairfax will earn $122/share in 2023. After we see Q1 results, does this number need to change?

Posted
11 hours ago, OliverSung said:

After lurking for years reading this forum, I'm jumping in real quick to plug the write-up I posted today on Fairfax. There isn't much new under the sun than what's already been said here (any one of you seems to know loads more than I do) but it may help you tie things together. Also, my working model is available for download at the bottom of the post. Feel free to change it around based on your own assumptions.

 

Fairfax Financial: No Clues from the Past


@OliverSung Nice write-up. It is very difficult to write a comprehensive article on Fairfax given the many important pieces - and the significant changes over the past 5 and 10 years. I really enjoyed reading you article. Thanks for posting.

Posted

The sale of Ambridge just closed. Proceeds are $400 million (with the opportunity to receive another $100 million subject to 2023 performance targets) and will result in a sizeable realized gain of $275 million for Fairfax. This gain will increase Q2 after tax earnings by +$10/share.

https://www.fairfax.ca/news/press-releases/press-release-details/2023/Amynta-Group-Completes-the-Acquisition-of-Ambridge-Group-from-Brit-a-subsidiary-of-Fairfax/default.aspx

 

With the recent closing of both Resolute and Ambridge deals, Fairfax has received proceeds of about $1 billion. This is a significant amount of money. At the same time, Fairfax is also earning a record amount of operating earnings (around $675 million per quarter). It will be interesting to see what new investments Fairfax makes. 

 

The sale of Ambridge is yet another example of Fairfax being opportunistic. This time with the sale of an asset at a premium valuation. Well done. 

----------

Brit purchased 50% of Ambridge in 2015 (shortly after Fairfax purchased Brit) for $29 million. Brit purchased the remaining 50% in 2019 for $46.6 million. In 2021, Brit combined their US operations with Ambridge. 

---------

Of interest, Fairfax purchased Brit for $1.657 million in 2015. Ambridge is being sold for $400 million (with the opportunity to receive another $100 million subject to 2023 performance targets). 

---------

 

FFH 2022 AR: Sale of Ambridge Group by Brit 

On January 7, 2023 Brit entered into an agreement to sell Ambridge Group,
operations, to Amynta Group. The company will receive approximately $400 on closing, comprised principally of cash of $275.0 and a promissory note of approximately $125. An additional $100.0 may be receivable based on 2023 performance targets of Ambridge. Closing of the transaction is subject to customary closing conditions, including regulatory approvals, and is expected to occur in the next few months. On closing of the transaction, the company expects to deconsolidate assets and liabilities with carrying values at December 31, 2022 of approximately $284 and $160, and to record a pre-tax gain of approximately $275 (prior to ascribing any fair value to the additional receivable). 

 

From Brit 2021 YE Press Release: In 2021, we combined our US operations to create a single operation under the Ambridge brand. It now operates as a global MGA, managing over $600m of premium in the US and internationally. Our clients have the benefit of the well- recognised Ambridge MGA model giving them better access to products and enhanced service, and our underwriting teams are better able to capitalise on business opportunities.

 

FFH 2019AR: On April 18, 2019 Brit acquired the 50.0% equity interest in Ambridge Partners LLC (‘‘Ambridge Partners’’) that it did not already own for $46.6, remeasured its existing equity interest to fair value for a gain of $10.4, and commenced consolidating Ambridge Partners.

 

FFH 2016AR: In 2015 Brit purchased 50% of Ambridge Partners, one of the world’s leading managing general agencies of transactional insurance products. In 2016 Ambridge produced gross premiums written of $32 million for Brit at a combined ratio well below 100%.

 

FFH 2015AR: In December, Brit made an investment in Ambridge Partners, one of the world’s leading managing general underwriters of transactional insurance products. These products insure losses as a result of breaches or inaccuracies in warranties and indemnities relating to M&A, restructuring activities, business financing and tax issues. Ambridge, which has been a partner of Brit for the last nine years, produces $128 million of premiums and is highly profitable. We welcome Jesseman Pryor (CEO), Jeffery Cowhey (President) and their team of 29 employees to Fairfax.

 

Posted

Fairfax Financial Holdings Limited: Financial Results for the First Quarter
Globe Newswire | 5:02 PM Eastern Daylight Time May 11, 2023
(Note: All dollar amounts in this news release are expressed in U.S. dollars except as otherwise noted. The financial results are derived from unaudited consolidated financial statements prepared using the recognition and measurement requirements of International Financial Reporting Standards as issued by the International Accounting Standards Board ("IFRS"). This news release contains certain non-GAAP and other financial measures, including underwriting profit (loss), adjusted operating income (loss), combined ratio, combined ratio points, book value per basic share, total debt to total capital ratio excluding non-insurance companies and excess (deficiency) of fair value over carrying value, that do not have a prescribed meaning under IFRS and may not be comparable to similar financial measures presented by other issuers. See "Glossary of non-GAAP and other financial measures" in the company's Interim Report for the three months ended March 31, 2023.)
TORONTO, May 11, 2023 (GLOBE NEWSWIRE) -- Fairfax Financial Holdings Limited (TSX: FFH and FFH.U) announces net earnings of $1,250.0 million ($49.38 net earnings per diluted share after payment of preferred share dividends) in the first quarter of 2023 compared to net earnings of $588.7 million ($22.67 net earnings per diluted share after payment of preferred share dividends) in the first quarter of 2022. Book value per basic share at March 31, 2023 was $803.49 compared to $762.28 at December 31, 2022 (an increase of 6.8% adjusted for the $10 per common share dividend paid in the first quarter of 2023).
"We got off to a great start in 2023, with our property and casualty insurance and reinsurance operations producing operating income of $1,309.3 million ($843.0 million excluding discounting and risk adjustment on claims of $466.3 million) for the first quarter, reflecting increased interest and dividends, increased share of profit of associates and strong insurance service result. Our underwriting performance in the first quarter of 2023 continued to produce favourable results, with additional growth in gross premiums written of 7.2% and net premiums written of 6.1%, primarily reflecting new business and continued incremental rate increases in certain lines of business. We achieved underwriting profit of $313.8 million on an undiscounted basis and a consolidated combined ratio of 94.0% for the quarter.
"On January 1, 2023 we were required to adopt the new accounting standard for insurance contracts (IFRS 17) – with the most significant changes being the discounting of our insurance liabilities and a specific risk margin for uncertainty. As we have stated before, this new reporting requirement will not change the way management evaluates the business and we will continue to be focused on underwriting profit on an undiscounted basis with strong reserving. The effects of discounting and risk adjustment in the quarter resulted in an increase to pre-tax earnings of $309.6 million.
"Net gains on investments of $771.2 million in the quarter were principally comprised of mark to market gains on common stocks of $410.4 million and bonds of $319.0 million. The pre-tax gain on the sale of Brit's MGA Ambridge of approximately $255 million was not accounted for in the first quarter as the transaction only closed on May 10, 2023. Also, on closing of the Gulf Insurance transaction, the company expects it will record a pre-tax gain of approximately $300 million when our equity interest increases from 43.7% to a controlling interest of 90.0%.
"As we have previously said, we have increased our interest and dividend annual run-rate to over $1.5 billion and have locked it in at this level for the next three years. Our fixed income portfolio is conservatively positioned with effectively 80% of our fixed income portfolio in government bonds and only 14% in primarily short-dated corporate bonds.
"We continue to focus on being soundly financed and ended the quarter with approximately $1.0 billion in cash and investments in the holding company, which does not include any proceeds from the sale of Brit's MGA Ambridge that closed on May 10, 2023," said Prem Watsa, Chairman and Chief Executive Officer.
The table below presents the sources of the company's net earnings in a format which the company has consistently used as it believes it assists in understanding Fairfax:
     First quarter
     2023              2022     
     ($ millions)
Gross premiums written    7,138.5              6,662.9     
Net premiums written    5,663.1              5,342.7     
Net insurance revenue    5,159.9              4,674.4     
                
Sources of net earnings               
Operating income - Property and Casualty Insurance and Reinsurance:               
Insurance service result:               
North American Insurers    275.8              211.6     
Global Insurers and Reinsurers    625.3              399.1     
International Insurers and Reinsurers    76.6              51.2     
Insurance service result    977.7              661.9     
Other insurance operating expenses    (197.6    )         (170.0    )
     780.1              491.9     
Interest and dividends    311.5              110.5     
Share of profit of associates    217.7              127.5     
Operating income - Property and Casualty Insurance and Reinsurance    1,309.3              729.9     
Operating income - Life insurance and Run-off    3.4              44.6     
Operating income (loss) - Non-insurance companies    (0.6    )         27.1     
Net finance income (expense) from insurance contracts and reinsurance contract assets held    (163.4    )         419.0     
Net gains (losses) on investments    771.2              (195.2    )
Interest expense    (124.3    )         (103.9    )
Corporate overhead and other expense    (26.5    )         (16.3    )
Earnings before income taxes    1,769.1              905.2     
Provision for income taxes    (365.1    )         (206.4    )
Net earnings     1,404.0              698.8     
                
Attributable to:               
Shareholders of Fairfax    1,250.0              588.7     
Non-controlling interests    154.0              110.1     
     1,404.0              698.8     

The table below presents the insurance service result for the property and casualty insurance and reinsurance operations reconciled to underwriting profit, a key performance measure used by the company and the property and casualty industry in which it operates. The reconciling adjustments are (i) other insurance operating expenses as presented on the consolidated statement of earnings, and (ii) the effects of discounting of losses and ceded losses on claims recorded in the period and the effects of the risk adjustment and other, which are presented in insurance service expenses and recoveries of insurance service expenses.
     First Quarter
     2023              2022     
     ($ millions)
Insurance service result    977.7              661.9     
Other insurance operating expenses    (197.6    )         (170.0    )
Discounting of losses and ceded losses on claims recorded in the period    (422.4    )         (175.7    )
Changes in the risk adjustment and other    (43.9    )         8.2     
Underwriting profit    313.8              324.4     
Interest and dividends    311.5              110.5     
Share of profit of associates    217.7              127.5     
Adjusted operating income - Property and Casualty Insurance and Reinsurance    843.0              562.4     

Adoption of IFRS 17 Insurance Contracts ("IFRS 17") on January 1, 2023
On January 1, 2023 Fairfax adopted the new accounting standard for insurance contracts (IFRS 17).
•    It resulted in considerable changes to the recognition, measurement, presentation and disclosure of the company’s insurance and reinsurance operations – the most significant being the discounting of the company's net insurance liabilities and a new risk adjustment for uncertainty.

•    This new accounting standard has not changed the way management evaluates the performance of its property and casualty insurance and reinsurance operations. The company remains focused on underwriting profit on an undiscounted basis with strong reserving with all of the property and casualty insurance and reinsurance operations continuing to use the traditional performance measures of gross premiums written, net premiums written and combined ratios to manage the business.

•    The cumulative effect of implementing IFRS 17 was $2.4 billion and was recognized as an increase in common shareholders' equity at December 31, 2022 (an increase in book value per share of $104.60), primarily reflecting the introduction of discounting net claims reserves of $4.7 billion, partially offset by a risk adjustment of $1.6 billion for uncertainty related to the timing and amount of cash flows from non-financial risk and by the tax effect of the measurement changes and other of $0.7 billion.

•    The new standard increased common shareholders' equity at December 31, 2022 to $17.8 billion, a book value per share of $762.28.
Highlights for the first quarter of 2023 (with comparisons to the first quarter of 2022 except as otherwise noted, and excluding the effects of IFRS 17 when discussing the combined ratio and adjusted operating income) include the following:
•    Net premiums written by the property and casualty insurance and reinsurance operations increased 6.1% to $5,619.4 million from $5,297.3 million, while gross premiums written increased by 7.2%.

•    The consolidated combined ratio of the property and casualty insurance and reinsurance operations was 94.0%, producing an underwriting profit of $313.8 million, compared to a combined ratio of 93.1% and an underwriting profit of $324.4 million in 2022, driven by continued growth in business volumes (net insurance revenue increased by 10.6%) and prudent expense management, partially offset by increased catastrophe losses of $191.9 million or 3.7 combined ratio points in the quarter.

•    Adjusted operating income of the property and casualty insurance and reinsurance operations increased by 49.9% to $843.0 million from $562.4 million, principally due to increased interest and dividend income and share of profit of associates.

•    Net finance expense from insurance contracts and reinsurance contract assets held of $163.4 million reflected interest accretion as a result of the unwinding of the effects of discounting recognized at higher interest rates compared to net finance income from insurance contracts and reinsurance contract assets held of $419.0 million in the prior year that benefited from the significant increase in discount rates during the quarter, the effects of which exceeded the interest accretion.

•    Consolidated interest and dividends increased significantly in the quarter from $168.9 million to $382.3 million. At March 31, 2023 the company's insurance and reinsurance companies held portfolio investments of $54.5 billion (excluding Fairfax India's portfolio of $2.0 billion), of which approximately $7.5 billion was in cash and short term investments representing approximately 13.7% of those portfolio investments. During the first quarter of 2023 the company used net proceeds from sales and maturities of short dated U.S. treasuries to purchase $5.9 billion of U.S. treasuries with maturities between 3 to 5 years, which will benefit interest and dividend income in the remainder of 2023.

•    Consolidated share of profit of associates of $333.8 million principally reflected share of profit of $94.6 million from Eurobank, $69.2 million from EXCO Resources Inc., $50.1 million from Poseidon (formerly Atlas Corp.) and $28.7 million from Gulf Insurance.

•    Net gains on investments of $771.2 million consisted of the following:

     First quarter of 2023
     ($ millions)
     Realized
gains
(losses)              Unrealized
gains              Net
gains     
Net gains (losses) on:                                   
      Equity exposures    172.7              237.7              410.4     
      Bonds    (331.9    )         650.9              319.0     
      Other    (63.1    )         104.9              41.8     
     (222.3    )         993.5              771.2     

Net gains on equity exposures of $410.4 million was primarily comprised of unrealized gains on common stocks, convertible bonds and preferred stocks and net gains on equity derivatives. At March 31, 2023 the company continued to hold equity total return swaps on 1,964,155 Fairfax subordinate voting shares with an original notional amount of $732.5 million (Cdn$935.0 million) or approximately $372.96 (Cdn$476.03) per share, on which the company recorded $139.8 million of net gains in the first quarter of 2023.
Net gains on bonds of $319.0 million included net gains of $216.9 million on U.S. treasuries and net gains of $55.8 million on corporate and other bonds (principally U.S. and other corporate bonds).
•    The Non-insurance companies reporting segment had an operating loss of $0.6 million in the first quarter of 2023 compared to operating income of $27.1 million in the first quarter of 2022. Excluding non-cash charges and adjustments and the operating loss at Grivalia Hospitality (consolidated on July 5, 2022), which together totaled $74.7 million in the first quarter of 2023, operating income increased by $47.0 million to $74.1 million, principally reflecting higher share of profit of associates and increased interest and dividend income at Fairfax India and higher business volumes at AGT.

•    Interest expense of $124.3 million (inclusive of $13.0 million on leases) was principally comprised of $81.8 million incurred on borrowings by the holding company and the insurance and reinsurance companies and $29.5 million incurred on borrowings by the non-insurance companies (which are non-recourse to the holding company).

•    At March 31, 2023 the excess of fair value over carrying value of investments in non-insurance associates and consolidated non-insurance subsidiaries was $439.1 million.

•    The company's total debt to total capital ratio, excluding non-insurance companies, decreased to 22.9% at March 31, 2023 compared to 23.7% at December 31, 2022, principally reflecting increased common shareholders' equity as a result of the strong net earnings reported in the quarter.

•    During the first quarter of 2023 the company purchased 156,685 of its subordinate voting shares for cancellation at an aggregate cost of $100.0 million.

•    Transactions closing or closed subsequent to March 31, 2023: 
•    On May 10, 2023 Brit completed the sale of Ambridge Group ("Ambridge"), its Managing General Underwriter operations, to Amynta Group. In the second quarter of 2023 Brit will deconsolidate the assets and liabilities of Ambridge and will record a pre-tax gain of approximately $255 million (prior to ascribing any fair value to the potential additional receivable).

•    On April 19, 2023 the company entered into an agreement to acquire all shares of Gulf Insurance Group K.S.C.P. (“Gulf Insurance”) under the control of KIPCO and certain of its affiliates, representing 46.3% of the equity of Gulf Insurance. On closing of the transaction, which is expected to be in the second half of 2023, the company's equity interest in Gulf Insurance will increase from 43.7% to a controlling interest of 90.0%. 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 $300 million, with changes in the company's carrying value of its equity accounted investment in Gulf Insurance up until the date of closing impacting the pre-tax gain.

There were 23.3 million and 23.8 million weighted average common shares effectively outstanding during the first quarters of 2023 and 2022 respectively. At March 31, 2023 there were 23,228,539 common shares effectively outstanding.
Consolidated balance sheet, earnings and comprehensive income information, together with segmented premium and combined ratio information, follow and form part of this news release.
As previously announced, Fairfax will hold a conference call to discuss its first quarter 2023 results at 8:30 a.m. Eastern time on Friday May 12, 2023. The call, consisting of a presentation by the company followed by a question period, may be accessed at 1 (888) 390-0867 (Canada or U.S.) or 1 (212) 547-0141 (International) with the passcode “FAIRFAX”. A replay of the call will be available from shortly after the termination of the call until 5:00 p.m. Eastern time on Friday, May 26, 2023. The replay may be accessed at 1 (800) 814-6746 (Canada or U.S.) or 1 (203) 369-3827 (International).
Fairfax Financial Holdings Limited is a holding company which, through its subsidiaries, is primarily engaged in property and casualty insurance and reinsurance and the associated investment management.
For further information, contact:    John Varnell
Vice President, Corporate Development
(416) 367-4941
      

CONSOLIDATED BALANCE SHEETS
as at March 31, 2023, December 31, 2022 and January 1, 2022 
(US$ millions except per share amounts)
          March 31,
2023         December 31,
2022         January 1,
2022
                         Restated(1)         Restated(1)
Assets                                        
Holding company cash and investments (including assets pledged for derivative obligations – $208.9; December 31, 2022 – $104.6; January 1, 2022 – $111.0)         971.6              1,345.8              1,478.3     
Insurance contract receivables         613.9              648.9              650.1     
                                         
Portfolio investments                                         
Subsidiary cash and short term investments (including restricted cash and cash equivalents – $731.0; December 31, 2022 – $854.4; January 1, 2022 – $1,246.4)         7,455.7              9,368.2              21,799.5     
Bonds (cost $32,271.3; December 31, 2022 – $29,534.4; January 1, 2022 – $13,836.3)         32,054.0              28,578.5              14,091.2     
Preferred stocks (cost $777.7; December 31, 2022 – $808.3; January 1, 2022 – $576.6)         2,324.4              2,338.0              2,405.9     
Common stocks (cost $5,600.0; December 31, 2022 – $5,162.6; January 1, 2022 – $4,717.2)         5,823.6              5,124.3              5,468.9     
Investments in associates (fair value $7,139.4; December 31, 2022 – $6,772.9; January 1, 2022 – $5,671.9)         6,035.4              6,093.1              4,749.2     
Derivatives and other invested assets (cost $872.3; December 31, 2022 – $869.8; January 1, 2022 – $888.2)         849.4              828.5              991.2     
Assets pledged for derivative obligations (cost $111.9; December 31, 2022 – $52.4; January 1, 2022 – $119.6)         113.4              51.3              119.6     
Fairfax India cash, portfolio investments and associates (fair value $3,079.1; December 31, 2022 – $3,079.6; January 1, 2022 – $3,336.4)         1,982.6              1,942.8              2,066.0     
          56,638.5              54,324.7              51,691.5     
                                         
Reinsurance contract assets held         9,891.6              9,691.5              9,893.1     
Deferred income tax assets         132.9              137.3              449.1     
Goodwill and intangible assets         5,737.2              5,689.0              5,928.2     
Other assets         7,183.6              6,981.3              6,034.1     
Total assets         81,169.3              78,818.5              76,124.4     
                                         
Liabilities                                        
Accounts payable and accrued liabilities         4,918.8              4,806.6              4,587.6     
Derivative obligations         301.3              191.0              152.9     
Deferred income tax liabilities         1,071.0              868.0              586.5     
Insurance contract payables         1,440.0              1,402.7              1,826.0     
Insurance contract liabilities         40,691.4              39,906.6              39,742.2     
Borrowings – holding company and insurance and reinsurance companies         6,631.7              6,621.0              6,129.3     
Borrowings – non-insurance companies         2,086.6              2,003.9              1,623.7     
Total liabilities         57,140.8              55,799.8              54,648.2     
                                         
Equity                                        
Common shareholders’ equity         18,663.8              17,780.3              15,199.8     
Preferred stock         1,335.5              1,335.5              1,335.5     
Shareholders’ equity attributable to shareholders of Fairfax         19,999.3              19,115.8              16,535.3     
Non-controlling interests         4,029.2              3,902.9              4,940.9     
Total equity         24,028.5              23,018.7              21,476.2     
          81,169.3              78,818.5              76,124.4     
                                         
                                         
Book value per basic share         803.49              762.28              636.89     
                                              
(1)   Restated for the transition to IFRS 17.


CONSOLIDATED STATEMENTS OF EARNINGS
for the three months ended March 31, 2023 and 2022
(US$ millions except per share amounts)
          First quarter
          2023              2022     
                    Restated(1)     
Insurance                    
Insurance revenue         6,279.9              5,638.2     
Insurance service expenses         (5,177.4    )         (4,697.8    )
Net insurance result         1,102.5              940.4     
Cost of reinsurance         (1,120.0    )         (963.8    )
Recoveries of insurance service expenses         1,004.3              691.1     
Net reinsurance result         (115.7    )         (272.7    )
Insurance service result         986.8              667.7     
Other insurance operating expenses         (246.1    )         (144.4    )
Net finance income (expense) from insurance contracts         (225.8    )         513.6     
Net finance income (expense) from reinsurance contract assets held         62.4              (94.6    )
          577.3              942.3     
Investment income                    
Interest and dividends         382.3              168.9     
Share of profit of associates         333.8              180.6     
Net gains (losses) on investments         771.2              (195.2    )
          1,487.3              154.3     
Other revenue and expenses                    
Non-insurance revenue         1,558.4              1,066.3     
Non-insurance expenses         (1,623.1    )         (1,075.0    )
Interest expense         (124.3    )         (103.9    )
Corporate and other expenses         (106.5    )         (78.8    )
          (295.5    )         (191.4    )
Earnings before income taxes         1,769.1              905.2     
Provision for income taxes         (365.1    )         (206.4    )
Net earnings         1,404.0              698.8     
                     
Attributable to:                    
Shareholders of Fairfax         1,250.0              588.7     
Non-controlling interests         154.0              110.1     
          1,404.0              698.8     
                     
Net earnings per share         53.17              24.23     
Net earnings per diluted share         49.38              22.67     
Cash dividends paid per share         10.00              10.00     
Shares outstanding (000) (weighted average)         23,282              23,838     
                               
(1)   Restated for the transition to IFRS 17.


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 
for the three months ended March 31, 2023 and 2022
(US$ millions)
          First quarter
          2023              2022     
                    Restated(1)     
                     
Net earnings         1,404.0              698.8     
                     
Other comprehensive income (loss), net of income taxes                    
                     
Items that may be reclassified to net earnings                    
Net unrealized foreign currency translation gains (losses) on foreign subsidiaries         60.6              (18.1    )
Losses on hedge of net investment in Canadian subsidiaries         (2.4    )         (24.9    )
Gains (losses) on hedge of net investment in European operations         (14.3    )         18.2     
Share of other comprehensive income (loss) of associates, excluding net gains (losses) on defined benefit plans         2.2              (47.0    )
Other         (3.3    )         —     
          42.8              (71.8    )
Net unrealized foreign currency translation gains on associates reclassified to net earnings         (4.8    )         —     
          38.0              (71.8    )
Items that will not be reclassified to net earnings                    
Net gains (losses) on defined benefit plans         (10.3    )         50.1     
Share of net gains on defined benefit plans of associates         0.3              5.8     
          (10.0    )         55.9     
                     
Other comprehensive income (loss), net of income taxes         28.0              (15.9    )
Comprehensive income          1,432.0              682.9     
                     
Attributable to:                    
Shareholders of Fairfax         1,264.9              600.7     
Non-controlling interests         167.1              82.2     
          1,432.0              682.9     
                               
(1)   Restated for the transition to IFRS 17.


SEGMENTED INFORMATION 
(US$ millions)
Third party gross premiums written, net premiums written and combined ratios, on an undiscounted basis, for the property and casualty insurance and reinsurance operations (excluding Life insurance and Run-off) in the first quarters ended March 31, 2023 and 2022 were as follows:
Gross Premiums Written
          First quarter    % change
year-over-
year
          2023              2022              
Northbridge         506.3              474.7              6.7    %
Crum & Forster         1,155.6              1,036.6              11.5    %
Zenith National         257.3              259.0              (0.7    )%
North American Insurers         1,919.2              1,770.3              8.4    %
                                              
Allied World         1,883.6              1,751.8              7.5    %
Odyssey Group         1,508.8              1,417.1              6.5    %
Brit(1)         895.1              885.4              1.1    %
Global Insurers and Reinsurers         4,287.5              4,054.3              5.8    %
                                              
International Insurers and Reinsurers         886.3              791.2              12.0    %
                                              
Property and casualty insurance and reinsurance         7,093.0              6,615.8              7.2    %

Net Premiums Written
          First quarter    % change
year-over-
year
          2023              2022              
Northbridge         443.1              431.1              2.8    %
Crum & Forster         855.3              833.3              2.6    %
Zenith National         259.8              257.5              0.9    %
North American Insurers         1,558.2              1,521.9              2.4    %
                                         
Allied World         1,460.8              1,334.3              9.5    %
Odyssey Group         1,409.6              1,320.0              6.8    %
Brit(1)         644.0              630.2              2.2    %
Global Insurers and Reinsurers         3,514.4              3,284.5              7.0    %
                                         
International Insurers and Reinsurers         546.8              490.9              11.4    %
                                         
Property and casualty insurance and reinsurance         5,619.4              5,297.3              6.1    %

Combined Ratios
          First quarter
          2023              2022     
Northbridge         91.1    %         87.3    %
Crum & Forster         94.7    %         94.8    %
Zenith National         99.3    %         95.4    %
North American Insurers         94.1    %         92.5    %
                     
Allied World         91.7    %         92.1    %
Odyssey Group         96.4    %         93.7    %
Brit(1)         90.8    %         91.8    %
Global Insurers and Reinsurers         93.5    %         92.8    %
                     
International Insurers and Reinsurers         96.4    %         97.5    %
                     
Property and casualty insurance and reinsurance         94.0    %         93.1    %
                               
(1)   Excluding Ki Insurance, gross premiums written decreased by 4.8% and net premiums written decreased by 2.2% in the first quarter of 2023. Excluding Ki Insurance, the combined ratios were 90.5% and 92.2% in the first quarter of 2023 and 2022.

Certain statements contained herein may constitute forward-looking statements and are made pursuant to the “safe harbour” provisions of the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities regulations. Such forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Fairfax to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to: a reduction in net earnings if our loss reserves are insufficient; underwriting losses on the risks we insure that are higher or lower than expected; the occurrence of catastrophic events with a frequency or severity exceeding our estimates; unfavourable changes in market variables, including interest rates, foreign exchange rates, equity prices and credit spreads, which could negatively affect our investment portfolio; the cycles of the insurance market and general economic conditions, which can substantially influence our and our competitors' premium rates and capacity to write new business; insufficient reserves for asbestos, environmental and other latent claims; exposure to credit risk in the event our reinsurers fail to make payments to us under our reinsurance arrangements; exposure to credit risk in the event our insureds, insurance producers or reinsurance intermediaries fail to remit premiums that are owed to us or failure by our insureds to reimburse us for deductibles that are paid by us on their behalf; our inability to maintain our long term debt ratings, the inability of our subsidiaries to maintain financial or claims paying ability ratings and the impact of a downgrade of such ratings on derivative transactions that we or our subsidiaries have entered into; risks associated with implementing our business strategies; the timing of claims payments being sooner or the receipt of reinsurance recoverables being later than anticipated by us; risks associated with any use we may make of derivative instruments; the failure of any hedging methods we may employ to achieve their desired risk management objective; a decrease in the level of demand for insurance or reinsurance products, or increased competition in the insurance industry; the impact of emerging claim and coverage issues or the failure of any of the loss limitation methods we employ; our inability to access cash of our subsidiaries; our inability to obtain required levels of capital on favourable terms, if at all; the loss of key employees; our inability to obtain reinsurance coverage in sufficient amounts, at reasonable prices or on terms that adequately protect us; the passage of legislation subjecting our businesses to additional adverse requirements, supervision or regulation, including additional tax regulation, in the United States, Canada or other jurisdictions in which we operate; risks associated with government investigations of, and litigation and negative publicity related to, insurance industry practice or any other conduct; risks associated with political and other developments in foreign jurisdictions in which we operate; risks associated with legal or regulatory proceedings or significant litigation; failures or security breaches of our computer and data processing systems; the influence exercisable by our significant shareholder; adverse fluctuations in foreign currency exchange rates; our dependence on independent brokers over whom we exercise little control; risks associated with IFRS 17; impairment of the carrying value of our goodwill, indefinite-lived intangible assets or investments in associates; our failure to realize deferred income tax assets; technological or other change which adversely impacts demand, or the premiums payable, for the insurance coverages we offer; disruptions of our information technology systems; assessments and shared market mechanisms which may adversely affect our insurance subsidiaries; and risks associated with the global pandemic caused by COVID-19 and the conflict in Ukraine. Additional risks and uncertainties are described in our most recently issued Annual Report which is available at www.fairfax.ca and in our Base Shelf Prospectus (under “Risk Factors”) filed with the securities regulatory authorities in Canada, which is available on SEDAR at www.sedar.com. Fairfax disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable securities law.
 

 

 

GlobeNewswire, Inc. 2023


 

Posted

At March 31, 2023 the company's fixed income portfolio duration increased from approximately 1.6 years at December 31, 2022 to approximately 2.5 years at quarter end, with $14.1 billion remaining invested in cash and principally short-dated investments (comprised of cash, short term investments and the bond portfolio invested in short-dated U.S treasuries), enabling the company to benefit significantly from increased interest income in the remainder of 2023 and provides an opportunity for the portfolio to be deployed into longer-dated bonds.

Posted

Book is now at $803 USD...should be trading at $1,050 CDN per share at the least.  With a steady $1.5B in interest and dividends coming in, P/B should move into the 1-1.2 times range this year.  Prem may see the $1,000 USD price per share he predicted a couple of years ago.  Cheers!

Posted
13 minutes ago, Parsad said:

Book is now at $803 USD...should be trading at $1,050 CDN per share at the least.  With a steady $1.5B in interest and dividends coming in, P/B should move into the 1-1.2 times range this year.  Prem may see the $1,000 USD price per share he predicted a couple of years ago.  Cheers!

Agree 100%,  The results are staggeringly good,  I think I might get this quarterly framed 😁.  $US1000/share here we come.  

Posted (edited)

Where to start... There is so much to digest from Fairfax's Q1 earnings release. But of course there is one thing that dwarfs everything else - and that is what they did with the fixed income portfolio. What Fairfax has done with their fixed income portfolio over the last 18 months will go down as one of their best investment decisions ever (well, string of decisions).

  • in Q4 of 2021, as interest rates approached zero, Fairfax shortened their fixed income portfolio to an average duration of 1.2 years. They nailed the move to shorter duration. Most P&C insurers were around 4 years.
  • in 2022, interest rates spiked. During 2022 Fairfax extended the average duration of their fixed income portfolio to 1.6 years.
  • and in Q1 of 2023, as interest rates topped out, we just learned the crazy bastards at Fairfax extended the average duration to 2.5 years. That is nuts. They just nailed the move to longer duration.

This now locks in $1.5 billion in interest and dividend income for 2023, 2024 and 2025 - just what Prem said at the AGM. He telegraphed this move. This gives Fairfax earnings much greater predictability for years into the future. Ratings agencies will love this. Analysts love this. This is a big input into the multiple that the shares should trade at.

 

So we now know what Fairfax was spending most of their money on in Q1: extending the duration of their fixed income portfolio. How did they do this? In Q1, Fairfax sold $5.3 billion of bonds due in 1 year or less and after 1 year through 3 years. They booked a loss on these sale of $332 million. Think about that. And then they proceeded to buy $7 billion of longer dated treasuries (mostly 3 to 5 years, but also 5 to 10 years). Fairfax saw a fat pitch... and knocked the ball out of the park.

 

And how does Fairfax's balance sheet look?

  • at Dec 31, 2022 Fairfax was sitting on a $967 million loss on their bond portfolio (see below).
  • at March 31, 2023, three short months later, Fairfax is now sitting on a $210 million loss. And given the move in interest rates so far in Q2, Fairfax is likely sitting on gains in its bond portfolio today.

As the US heads into a likely recession, what about credit quality?

- "Our fixed income portfolio is conservatively positioned with effectively 80% of our fixed income portfolio in government bonds and only 14% in primarily short-dated corporate bonds." Freaking brilliant!

 

When looking at fixed income portfolios, Fairfax is best in class among P&C insurers (and it's not even close). Well done to the fixed income team at Fairfax.

----------

One more thing... what are 'US treasury bond forward contracts'? Fairfax entered into notional amount of $2.985 billion of these... cha ching!

 

"U.S. treasury bond forward contracts: During the first quarter of 2023 the company entered into forward contracts to buy U.S. treasury bonds with a notional amount at March 31, 2023 of $2,984.7 (December 31, 2022 - nil) where the contracts held will provide an investment opportunity to buy U.S. treasury bonds as other fixed income investments mature. These contracts to buy U.S. treasury bonds have an average term to maturity of less than six months and may be renewed at market rates."

----------

  • Investors can speculate on future prices and use a fixed income forward contract to lock in the price today for a profit. For example, an investor may believe that interest rates will drop... which will cause the bond to increase in value.
  • Therefore, they enter a fixed income forward contract to buy the bond in the future and lock in the delivery price today. If the speculation proves right, the investor could buy the bond in the future for cheaper than its market value.
  • https://corporatefinanceinstitute.com/resources/fixed-income/fixed-income-forward-contract/

----------

image.thumb.png.65399ac39f4c77b4571dab23fa5eeaf4.png

 

 

 

Edited by Viking
Posted
7 minutes ago, Viking said:

Where to start... There is so much to digest from Fairfax's Q1 earnings release. But of course there is one thing that dwarfs everything else - and that is what they did with the fixed income portfolio. What Fairfax has done with their fixed income portfolio over the last 18 months will go down as one of their best investment decisions ever (well string of decisions).

  • in Q4 of 2021, Fairfax shortened their fixed income portfolio to an average duration of 1.2 years. They nailed the move to shorter duration. Most P&C insurers were around 4 years.
  • in 2022, interest rates spiked. During 2022 Fairfax extended the average duration of their fixed income portfolio to 1.6 years.
  • and we just learned the crazy bastards at Fairfax just extended the average duration to 2.5 years. That is nuts. They just nailed the move to longer duration.

This now locks in $1.5 billion in interest and dividend income for 2023, 2024 and 2025 - just what Prem said at the AGM. He telegraphed this move. This gives Fairfax earnings much greater predictability for years into the future. Ratings agencies will love this. Analysts love this. This is a big input into the multiple that the shares should trade at.

 

So we now know what Fairfax was spending most of their money on in Q1: extending the duration of their fixed income portfolio. How did they do this? In Q1, Fairfax sold $5.3 billion of bonds due in 1 year or less and after 1 year through 3 years. They booked a loss on these sale of $332 million. Think about that. And then they proceeded to buy $7 billion of longer dated treasuries (mostly 3 to 5 years, but also 5 to 10 years). Fairfax saw a fat pitch... and knocked the ball out of the park.

 

And how does Fairfax's balance sheet look?

  • at Dec 31, 2022 Fairfax was sitting on a $967 million loss on their bond portfolio (see below).
  • at March 31, 2023, three short months later, Fairfax is now sitting on a $210 million loss. And given the move in interest rates so far in Q2, Fairfax is likely sitting on gains in its bond portfolio today.

As the US heads into a likely recession, what about credit quality?

- "Our fixed income portfolio is conservatively positioned with effectively 80% of our fixed income portfolio in government bonds and only 14% in primarily short-dated corporate bonds." Freaking brilliant!

 

When looking at fixed income portfolios, Fairfax is best in class among P&C insurers (and it's not even close). Well done to the fixed income team at Fairfax.

----------

One more thing... what are 'US treasury bond forward contracts'? Fairfax entered into notional amount of $2.985 billion...

  • Investors can speculate on future prices and use a fixed income forward contract to lock in the price today for a profit. For example, an investor may believe that interest rates will drop... which will cause the bond to increase in value.
  • Therefore, they enter a fixed income forward contract to buy the bond in the future and lock in the delivery price today. If the speculation proves right, the investor could buy the bond in the future for cheaper than its market value.

----------

image.thumb.png.65399ac39f4c77b4571dab23fa5eeaf4.png

 

 

 

 

Nice analysis Viking!  Cheers!

Posted

Outrageous !!!

 

Prem promised to never short any markets again. And here he is loading up on treasury forward contracts, effectively betting on the bear against the bond market.  
 

This breach must be tabled at the call tomorrow. We were told that these bearish activities have stopped. 

Posted
7 minutes ago, Xerxes said:

Outrageous !!!

 

Prem promised to never short any markets again. And here he is loading up on treasury forward contracts, effectively betting on the bear against the bond market.  
 

This breach must be tabled at the call tomorrow. We were told that these bearish activities have stopped. 


i think they simply want to keep buying longer dated treasuries in Q2 and Q3 as bonds mature - and still be able to get Q1 yields: “where the contracts held will provide an investment opportunity to buy U.S. treasury bonds as other fixed income investments mature.” Very smart. Creative. Opportunistic.

 

Posted
2 hours ago, Xerxes said:

Outrageous !!!

 

Prem promised to never short any markets again. And here he is loading up on treasury forward contracts, effectively betting on the bear against the bond market.  
 

This breach must be tabled at the call tomorrow. We were told that these bearish activities have stopped. 

 

Should note also that the notional amount is $3B compared to a bond portfolio of $32B...so the actual short position is about $300M or so...1% of the total bond portfolio.  That's in significant contrast to what their short positions in equities were like in the past.  Cheers!

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