Fairfax 2023

[kab60]

Results look pretty good. Analysts will love that they locked in some duration, and the timing looks favorable. Now they just need a big recession and/or stock market crash and flight to safety, so their treasuries get bid up, and they can swap to corporate bonds.

[petec]

2 hours ago, Parsad said:

Prem promised to never short any markets again.

From memory, this statement is significant overstretch compared to what he actually said!

[MMM20]

I think it's also worth highlighting that they bought back 0.7% of shares last quarter and still didn't unwind the total return swaps. There are attractive alternative uses of cash right now, but seems like the Teledyne plan is still on track.

 

Edited May 12, 2023 by MMM20

[MMM20]

4 hours ago, MMM20 said:

I think it's also worth highlighting that they bought back 0.7% of shares last quarter and still didn't unwind the total return swaps. There are attractive alternative uses of cash right now, but seems like the Teledyne plan is still on track.

 

$900-1000+ USD stock would be in line with the post-'08 average P/B multiple of ~1.1-1.2x when you adjust for gains from Brit, GIG, and Digit. BVPS is really ~$830+ USD and ~$850+ fully marked to market. Intrinsic value is clearly $1500-2000+ USD.

 

Edited May 12, 2023 by MMM20

[gfp]

So they mentioned that the forward purchase of 3yr treasuries they entered into is locking in the purchase of 3-yr treasuries at a 3.75% rate.  So they didn't top tick the US 3-year rate during the quarter by any means.  I still like the move.

 

[gfp]

Great conference call.  Prem pointed out that the $2.4 Billion adjustment from the new accounting rules that discount liabilities would have been offset by approx. $2.4 Billion and cancelled out if they had been running a matched book as far as their insurance liabilities (over 4 years) and their bond portfolio (1.6 years in 2022).  So they recorded this big benefit because of how they were positioned.

 

803.49 bvps + 19 pretax for unmarked fair value + 24 pretax for announced deal gains that closed post quarter end.

[modiva]

Phenomenal results and outlook. Congrats to all the longs! 

[TwoCitiesCapital]

2 hours ago, gfp said:

So they mentioned that the forward purchase of 3yr treasuries they entered into is locking in the purchase of 3-yr treasuries at a 3.75% rate.  So they didn't top tick the US 3-year rate during the quarter by any means.  I still like the move.

 

 

It was done a little later than I hoped and 2.5 is a little less duration than I wanted, but it's FAR better than the 1.6 they were at. 

 

Glad to see we have visibility of interest income for the next 3-ish years and some potential to benefit from dislocations with reasonable duration exposure.

 

MoM CPI is showing obvious decelerations. If you strip of out shelter (which is still rising in the monthly figures due to the lag in reflecting price adjustments that are already falling), then you get CPI at something like 1% annualized already. With bank failures/tightening credit conditions having started a month ago, and real estate prices falling, my expectation is that this obviously gets worse before it gets better and that we're probably looking at deflationary prints ~6 months out. Glad they managed to eek it out and lock some in even if not at the top. 

 

 

Edited May 12, 2023 by TwoCitiesCapital

[Santayana]

Looks like Mr. Market is back to it's old ways of not reacting to earnings the next day.  I expect there will be a nice little pop next week.  I'm tempted to add even though I'm already quite overweight.

[Crip1]

8 minutes ago, Santayana said:

Looks like Mr. Market is back to it's old ways of not reacting to earnings the next day.  I expect there will be a nice little pop next week.  I'm tempted to add even though I'm already quite overweight.

Was thinking the same way...it's happened numerous times over the years and it would not surprise if it happened again this time.

 

-Crip

 

[Parsad]

59 minutes ago, Santayana said:

Looks like Mr. Market is back to it's old ways of not reacting to earnings the next day.  I expect there will be a nice little pop next week.  I'm tempted to add even though I'm already quite overweight.

 

Did pop to a record $971 CDN today, but then dropped back down.  Cheers!

[Viking]

I just added to my overweight position in Fairfax.
 

I am updating my earnings estimate for 2023 and i think it will come in around US$140-$150/share. Stock is trading at $692. BV is $803. 

• PE is under 5 x 2023E earnings.
• P/BV is 0.86
• ROE = 17.4%

With the average duration of the bond portfolio getting pushed to 2.5 years we now know interest and dividend income will be $1.5 billion in 2023, 2024 and now 2025. Importantly, it is also perfectly positioned for a US recession, with 80% in government bonds and a small 14% in corporate bonds that are short term. When credit spreads blow out Fairfax is ready to shift into higher yielding longer duration corporates bonds. Smart buggers.

 

Share of profit of associates was over $300 million. This puts it on a run rate of better than $1.1 billion in 2023. My guess is we should see $1.2 billion in 2024 and $1.3 billion in 2025. Eurobank is on fire. Wait until Atlas gets going.

 

Insurance continues to grow nicely. The hard market in property cat is picking up steam. The top line growth is slowing and my guess is this is because Fairfax is prioritizing profitability - something we all want to see. This should keep their CR in the mid 90’s moving forward. This will lock in underwriting profit of more than $1 billion per year moving forward. And insurance results (top and bottom line) will get a nice boost when the GIG transaction closes and their results get added to the international bucket.

 

Ambridge gains of $255 million are coming in Q2. GIG gain of $300 million is coming in 2H. 
 

In terms of capital allocation, it was nice to see Fairfax buying stock in Q1 ($100 million). They also paid out $250 million in the quarter for the $10 dividend. I would expect Fairfax to keep buying back stock in Q2 - spending perhaps $150-$200 million.

Growing earnings and lower share count is a great one-two punch for investors. I think we will also get - slowly and over time - multiple expansion as more investors come to understand the new Fairfax. And then we will have the trifecta: growing earnings + lower share count + higher multiple. 

 

When i weave it all together, the Fairfax story continues to get markedly better. My usual approach would be to lock in big gains. Instead, i decided to channel my Peter Lynch and buy more. I decided to water my flowers (not pull them).
 

Over the past 5 years Fairfax has morphed right in front of our eyes from an ugly caterpillar and transformed itself into a beautiful butterfly. Time is the friend of the wonderful business. And yes, after a lost decade, i think we can today call Fairfax ‘a wonderful business’. 

Edited May 12, 2023 by Viking

[MMM20]

17 hours ago, Viking said:

I just added to my overweight position. 

Same here. Added a bunch in the low $690s and it was already my biggest by a lot. I’m having trouble recalling a better setup. Hope we’re not missing something. Not investment advice.  
 

Edited May 13, 2023 by MMM20

[gary17]

risks related to the debt ceiling.... i think that's what the market is pricing in.

[backtothebeach]

3 minutes ago, MMM20 said:

Hope we’re not missing something.

How would a severe hurricane season change earnings? Buffett said at the annual meeting that Berkshire wrote a LOT of cat insurance, most of it in Florida of all places. Is it similar for Fairfax?

[MMM20]

1 hour ago, backtothebeach said:

How would a severe hurricane season change earnings? Buffett said at the annual meeting that Berkshire wrote a LOT of cat insurance, most of it in Florida of all places. Is it similar for Fairfax?

I should really have a more precise sense of that but i guess I put that in the known and manageable risks bucket. [removed incorrect comment on BRK FL exposure]

 

Maybe my glasses are too rose colored, but it seems like from FFH’s current position of strength and generally more long tail oriented exposures, that would of course mean volatility in the stock but might even be accretive to intrinsic value by magnifying and extending the hard market as others retrench further.
 

Wonder if others here see it differently. 
 

Edited May 12, 2023 by MMM20

[gfp]

22 minutes ago, MMM20 said:

I should really have a more precise sense of that but i guess I put that in the known and manageable risks bucket. I believe Ajit said the pricing had risen to such an attractive level that they’d essentially break even (at the policy level) at worst and make a ~50% return if no bad hurricanes.

 

I think Ajit said at worst they would "take a loss of $15 Billion" and if no major storm hits Florida they could make "several billion dollars."  The $15 B number would be across all exposures, up to their limits, including GEICO, boats, etc..

Edited May 12, 2023 by gfp

[MMM20]

1 hour ago, gfp said:

 

I think Ajit said at worst they would "take a loss of $15 Billion" and if no major storm hits Florida they could make "several billion dollars."  The $15 B number would be across all exposures, up to their limits, including GEICO, boats, etc..

Ah ok, I must’ve misunderstood. 
 

I wonder if FFH’s analogous worst case would be about 1 year of interest+dividend income at this new run rate. 
 

Maybe I’m way off!
 

Edited May 12, 2023 by MMM20

[Parsad]

2 hours ago, backtothebeach said:

How would a severe hurricane season change earnings? Buffett said at the annual meeting that Berkshire wrote a LOT of cat insurance, most of it in Florida of all places. Is it similar for Fairfax?

 

Assume Fairfax is going to get hit by 0.8-1% of any large scale catastrophe loss.  Berkshire generally gets hit by 5-8%.  I wouldn't worry so much about exposure to a specific region...they are good about that.  On a historical basis, they've always fallen into that range and regardless of where or what was hit, they've always managed their losses geographically.  If they took on more Florida exposure because rates were good, they probably laid off a chunk of their potential losses through reinsurance.  Berkshire doesn't do that...Berkshire is the reinsurer of last resort in most cases.  Cheers!

[MMM20]

10 minutes ago, Parsad said:

 

Assume Fairfax is going to get hit by 0.8-1% of any large scale catastrophe loss.  Berkshire generally gets hit by 5-8%.  I wouldn't worry so much about exposure to a specific region...they are good about that.  On a historical basis, they've always fallen into that range and regardless of where or what was hit, they've always managed their losses geographically.  If they took on more Florida exposure because rates were good, they probably laid off a chunk of their potential losses through reinsurance.  Berkshire doesn't do that...Berkshire is the reinsurer of last resort in most cases.  Cheers!

Do you think it’s fair to ballpark a Hurricane Andrew scenario at $500mm-$1b in losses for FFH? In other words likely much less than 1 year of run-rate interest and dividends at this point. 

 

Edited May 12, 2023 by MMM20

[Parsad]

24 minutes ago, MMM20 said:

Do you think it’s fair to ballpark a Hurricane Andrew scenario at $500mm-$1b in losses for FFH? In other words likely much less than 1 year of run-rate interest and dividends at this point. 

 

 

You mean 1992 Hurricane Andrew?  That would be a $100B+ loss in today's dollars.  So FFH would take a $800m-$1B loss and BRK would take a $5-8B loss.  A portion of FFH's loss may be offset by some reinsurance, but it would still be no less than $500M.  BRK would take a $5-8B loss.

 

Fairfax generally can survive an 8.0 earthquake in California and a F5 hurricane hitting Florida...both in the same year.  That would be $500-700B in losses in todays dollars most likely.  So a $5-7B loss for FFH...remembering a chunk of that would be offset by reinsurance.  BRK would take a $25-50B hit.

 

A $5B loss for Fairfax would wipe out 25% of its equity.  A $50B hit to BRK would wipe out only 10% of its equity.

 

One other note, insurance is the only business in the world where the economics of the industry are extremely good after the worst possible thing happens.  No other industry works like that!  So while FFH and BRK would get hit, they would be huge beneficiaries for several years afterwards on premium pricing. 

 

It's why risk management is absolutely crucial when it comes to insurance.  You manage risk so that your lumps aren't so painful, because once you get through that pain, it's nirvana on the other side!

 

Cheers!

[MMM20]

Thanks @Parsad for the confirmation and insight.

[This2ShallPass]

On 5/11/2023 at 5:27 PM, Viking said:

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.

Amazing quarter, great to see duration at 2.5 years! That's all we were asking last Q, there was no need to stop at 1.6 but glad they made it up this qtr. And locking in $3B at 3.75% for next 6 months gives more room..

[Viking]

On 5/10/2023 at 3:40 PM, Viking said:

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?

 

Below are the answers to the questions i posed before Q1 results were released. Great start to the year.

 

Insurance: 

1.) what is top line growth? Over or under 10%? Answer: 6%

• growth is slowing; but still solid.

2.) what is the CR? Over or under 95? Answer: 94

• like other insurers, sightly elevated cat losses in Q1.

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

• positive outlook overall.

Fixed income portfolio:

4.) what kind of increase do we see in interest income? $382 million

• Run rate for interest and dividend income looks to have levelled off at $1.5 billion.

5.) did average duration of bond portfolio get pushed out closer to 2 years? Yes. Got to 2.5 years.

• $1.5 billion in interest and dividend income is likely for 2023, 2024 and 2025.

6.) given fall in interest rates in March, do we see mark to market gains in fixed income? Yes. $319 million gain.

 

Equity Portfolio: 

7.) what is amount of mark to market gain? $410 million

• My estimate was around $300 million.

8.) Resolute closed in Q1. Proceeds were $625 million. Likely used to purchase longer dated treasuries.

 

Other:

9.) share of profits of associates? $334 million.

• surprisingly high. Lead by Eurobank at $94 million.
• tracking at more than $1.1 billion for 2023, which would be a record.

10.) Book value? $803 (including IFRS-17)

• Dec 31 BV (old) = $658/share
• Dec 31 BV (IFRS-17) = $764/share (+$106 vs old)
• March 31 BV (new) = $764 + $49 (earnings) - $10 (dividend) = $803/share

11.) share buybacks during quarter? Yes.

• At March 31, 2023, effective common shares outstanding = 23.2 million.
• At Dec 31, 2022, effective common shares outstanding = 23.3 million.

12.) what is net debt? No material change from Dec 31, 2022.

13.) capital allocation priority moving forward?

• strong financial position
• support growth of insurance subs
• share buybacks

Updates/Commentary:
14.) Ambridge Partners: sale close in May. Gain  = $255 million.

15.) GIG purchase of Kipco’s 46% stake: should close in 2H; will result in $300 million gain.

16.) Digit IPO: timing update? Working on getting regulatory approvals. IPO will happen when market conditions are supportive.

—————

Is Fairfax on glide path to earn $2.4 billion from underwriting income + interest and dividend income in 2023? Yes. New estimate = $2.6 billion.

—————

Edited May 13, 2023 by Viking

[kodiak]

I thought the 1st quarter earnings were just as good, if not better, than the 4th quarter 2022 earnings. These are fantastic results and the future earnings potential of the company has never been better. We are locked on bond portfolio, the underwriting results in this hard market should be fine and the results from the equity portfolio are icing on the cake. I was very disappointed the market did not give us instant gratification on Friday. I added to my already oversized Fairfax position. I simply think Fairfax stock price will double over the next 3 years. The math looks pretty simple. The book is $800 and we are sell for less than $700. We are going to add $150 per year for three years from earnings. Book value in 36 months would therefore be around $1,250 per share. The extra $450 per share in earnings should generate another 10%+ on equity, so earnings in year 4 could be closer to $200 per share. If the shares trade for $1,400 each in 36 months, they will be trading at 112% of book value and the company will be looking at a return on equity on that book value of about 16%. That does not include any good news from Digit, Anchorage, extraordinary buybacks at Fairfax or anything else. If people have easier to understand set up than Fairfax for the next 3 years, please tell us. This elevator pitch took one long paragraph. Maybe 150 words. Plus it is happening right now. No turnaround necessary. No special potion or magic trick. It is all in front of us. 

 

We can think about things that will derail this story, but the basic story is so simply that being contrary may just end up costing folks money. This is the fat pitch that Ted Williams and Buffett talk about all the time. Investing is about probability. Doesn't mean it has to happen. This set-up has high probability for excellent outcomes. My investment is Pathward (CASH) has the same risk/reward type set-up. Wish I really had more of these.