Fairfax 2023

[maxthetrade]

On 5/12/2023 at 9:02 PM, Viking said:

I just added to my overweight position in Fairfax.

 

Added to my position in the last trading hour as well. The story keeps getting better and the stock is still reasonably cheap. I hope it stays around current levels for the next week because I'll have to invest funds in a new account next week.

Edited May 13, 2023 by maxthetrade

[Viking]

Fairfax full-year 2023 earnings update

 

What did we learn from Fairfax's Q1 earnings? The story continues to get better. As a result, I am bumping up my 2023 full-year earnings estimate to US$150/share (from $130/share made back in Feb).

• 2023YE BV = US$904 = $764 + $150 - $10
• Stock price May 12, 2023 = $690
• Fairfax trades today at a PE of 4.6 and P/BV = 0.76 (2023YE)

IFRS-17: it will take me a while to better understand how IFRS-17 will impact Fairfax’s results moving forward. If i have messed up with my numbers below please let me know.

 

 

Assumptions:

1. underwriting profit = $1.2 billion
   • top line grows at 8-10% and CR = 95
   • assumptions: an average year for catastrophes; small tailwind from hard market; reserve releases similar to 2022.
2. interest and dividends = $1.5 billion
   • average duration was increased in Q1 from 1.6 to to 2.5 years. This locks in $1.5 billion for 2023, 2024 and 2025.
3. Share of profit of associates = $1.1 billion
   • Q1 was a positive surprise at $334 million
   • Eurobank was the standout in Q1, coming in at $94 million.
4. IFRS-17: Effects of discounting and risk adjustment
   • Q1 was $310 million
   • I will update this number each quarter as we get results.
5. Life Insurance and Run-off = similar to 2022
6. Other (non-insurance consolidated companies) = $75 million
   • This was a disappointment in Q1, coming in at - $68 million.
7. Interest expense = $500 million
   • Q1 was $124 million
8. Corporate overhead and other = similar to 2022
9. Net gains on investments = $1.1 billion
   • $771 million in Q1 (stocks = $410; bonds $319 million)
10. Other gains = $555 million
    • Ambridge sale = $255 million gain (May)
    • GIG gain = $300 million (2H)
11. Income tax = guess (19%?)
12. Non-controlling interests = guess (11%?)
13. Effective share outstanding March 31, 2023 = 23.23 million
    • purchased in Q1 a total of 156,685 shares for $100 million (US$638/share)  

Notes:

• Underwriting profit: includes insurance and reinsurance; does not include runoff or Eurolife life insurance.
• Interest and dividends: includes insurance, reinsurance and runoff.

Edited May 14, 2023 by Viking

[glider3834]

7 hours ago, Viking said:

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

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

yes cats were more elevated - underlying CR (ex cats) in Q1'23 was around same level as Q1'22

 

 

[Viking]

Fairfax Financial: 'The big fish that got away’

 

Investors have lots of regrets. Missed opportunities. 'The big fish that got away.' Like not buying Fairfax (or selling your position) at US$492 on Dec 31, 2021. On Friday, FFH shares closed at US$690. That is a 40% increase in 15.5 months. Fairfax also paid out two $10 dividends.

 

How has the S&P500 performed since December 31, 2021? It is down 13%. Yikes! That makes Fairfax’s performance even better!

 

But guess what? Fairfax is actually a better buy today (at US$690) than it was on Dec 31, 2021 (at $492). As we digest Q1 results, the big fish is back and once again taunting investors…

 

How can this be? It’s not that complicated if you believe the following: a stock is worth the present value of the cash flows that are expected to be generated in the future.

 

To prove our preposterous claim we need to answer three questions (we are going to keep things very top line… to make it as easy as possible to follow):

1.) what did investors expect future operating cash flows to be for Fairfax at Dec 31, 2021 when shares closed at $492?

2.) what actually happened with the business over the past 15.5 months?

3.) what do investors expect future operating cash flows to be for Fairfax at May 13, 2023 when shares closed at $690?

-----------

1.) what did investors expect future operating cash flows to be for Fairfax at Dec 31, 2021 when shares closed at $492?

• Fairfax earned $1.8 billion in operating income in 2021 (see table below) or $77/share pre-tax.
• investors expected this to increase to perhaps to $2 billion in 2022, with modest growth thereafter.
• that was the level of operating earnings that were built into Fairfax’s stock price of $490 at December 31, 2021.

2.) what actually happened with the business over the past 15.5 months? For this part, we are only going to look at three asset sales by Fairfax:

• in June 2022, Fairfax sold its pet insurance business for $992 million after-tax = $40/share
• in July 2022, Fairfax sold Resolute Forest Products at the top of the lumber cycle for $625 million plus $180 million CVR. Dec 31, 2021, Resolute had a carrying value of $276 million. With the sale, Fairfax crystallized $350 a million gain (plus $180 CVR). Let’s say this was a $10 after-tax gain (let's be conservative).
• in January 2023, Fairfax sold Ambridge Partners for $400 million plus $100 million performance incentive. Pre-tax gain will be $255 million (plus present value of performance incentive). The deal closed in May. Let’s say this is another $10/share after-tax gain.

These three transaction delivered an unexpected $60/share after-tax gain for Fairfax shareholders. This $60 was a one time gift for shareholders. Totally unexpected. Like finding a pile of gold in your back yard.

 

3.) what do investors expect future operating cash flows to be for Fairfax at May 13, 2023 when shares closed at $690?

• Fairfax earned $3.1 billion, or $132/share pre-tax, in operating income in 2022. This was much more than expected at the start of the year.
• Fairfax is poised to earn $3.8 billion in operating income in 2023, or $167/share pre-tax. Nobody thought this was remotely possible Dec 31, 2021.
• This is more than double what Fairfax earned in 2021, or an increase of $90/share pre-tax. Think about that. Double.
• And Fairfax is poised to earn $3.8 billion in operating income in 2024 and 2025. 

What happened?

• underwriting profit beat expectations: hard market is lasting longer than expected. In 2022, Fairfax grew net premiums written by 25% and delivered a better than expected CR of 94.7. 
• interest and dividend income: interest rates spike much higher than expected. And Fairfax just locked in higher rates moving from 1.2 year average duration Dec 31, 2021 to 2.5 years at March 31, 2023. 
• share of profit of associates: earnings from Fairfax’s collection of associate holdings increased much more than expected. This is expected to grow further in the coming years.
• all three 'buckets' are delivering much more earnings than expected - new records every year. Especially interest and dividends and share of profit of associates. 

Most importantly, 2023 operating earnings of $3.8 billion are expected to be the new baseline for Fairfax moving forward. 2024 and 2025 operating earnings should be able to grow from 2023 levels. In short, $3.8 billion in operating earnings will be D-U-R-A-B-L-E. This is the critical point that I think many investors are missing today.

 

So Fairfax’s stock price went up $200 over the past 15.5 months. Three unexpected asset sales delivered $60 after-tax to shareholders. That leaves us with $140. How much is an increase in operating earnings of $1.9 billion ($90/share pre-tax = $70/after-tax) worth to shareholders? Is it worth $140/share? It is worth much, much more than that. Because it is durable.

 

What is the better buy?

 

A.) Fairfax at $490/share at Dec 31, 2021 - knowing what was known then.

B.) Fairfax at $690/share at May 13, 2023 - knowing what we know now.

 

My choice is B. And it’s not even close.

 

Just like December 31, 2021, that big fish (called Fairfax) is once again staring investors right in the face. And guess what? It’s probably going to slip away from most investors for a second time. And in another couple of years they will think back to today and kick themselves. And the story of ‘the big fish that got away’ will get even bigger.

 

 

Edited May 14, 2023 by Viking

[keegomaster]

2 hours ago, Viking said:

Fairfax Financial: 'The big fish that got away’

 

Investors have lots of regrets. Missed opportunities. 'The big fish that got away.' Like not buying Fairfax (or selling your position) at US$492 on Dec 31, 2021. On Friday, FFH shares closed at US$690. That is a 40% increase in 15.5 months. Fairfax also paid out two $10 dividends.

 

How has the S&P500 performed since December 31, 2021? It is down 13%. Yikes! That makes Fairfax’s performance even better!

 

But guess what? Fairfax is actually a better buy today (at US$690) than it was on Dec 31, 2021 (at $492). As we digest Q1 results, the big fish is back and once again taunting investors…

 

How can this be? It’s not that complicated if you believe the following: a stock is worth the present value of the cash flows that are expected to be generated in the future.

 

To prove our preposterous claim we need to answer three questions (we are going to keep things very top line… to make it as easy as possible to follow):

1.) what did investors expect future operating cash flows to be for Fairfax at Dec 31, 2021 when shares closed at $492?

2.) what actually happened with the business over the past 15.5 months?

3.) what do investors expect future operating cash flows to be for Fairfax at May 13, 2023 when shares closed at $690?

-----------

1.) what did investors expect future operating cash flows to be for Fairfax at Dec 31, 2021 when shares closed at $492?

• Fairfax earned $1.8 billion in operating income in 2021 (see table below) or $77/share pre-tax.
• investors expected this to increase to perhaps to $2 billion in 2022, with modest growth thereafter.
• that was the level of operating earnings that were built into Fairfax’s stock price of $490 at December 31, 2021.

2.) what actually happened with the business over the past 15.5 months? For this part, we are only going to look at three asset sales by Fairfax:

• in June 2022, Fairfax sold its pet insurance business for $992 million after-tax = $40/share
• in July 2022, Fairfax sold Resolute Forest Products at the top of the lumber cycle for $625 million plus $180 million CVR. Dec 31, 2021, Resolute had a carrying value of $276 million. With the sale, Fairfax crystallized $350 a million gain (plus $180 CVR). Let’s say this was a $10 after-tax gain (let's be conservative).
• in January 2023, Fairfax sold Ambridge Partners for $400 million plus $100 million performance incentive. Pre-tax gain will be $255 million (plus present value of performance incentive). The deal closed in May. Let’s say this is another $10/share after-tax gain.

These three transaction delivered an unexpected $60/share after-tax gain for Fairfax shareholders. This $60 was a one time gift for shareholders. Totally unexpected. Like finding a pile of gold in your back yard.

 

3.) what do investors expect future operating cash flows to be for Fairfax at May 13, 2023 when shares closed at $690?

• Fairfax earned $3.1 billion, or $132/share pre-tax, in operating income in 2022. This was much more than expected at the start of the year.
• Fairfax is poised to earn $3.8 billion in operating income in 2023, or $167/share pre-tax. Nobody thought this was remotely possible Dec 31, 2021.
• This is more than double what Fairfax earned in 2021, or an increase of $90/share pre-tax. Think about that. Double.
• And Fairfax is poised to earn $3.8 billion in operating income in 2024 and 2025. 

What happened?

• underwriting profit beat expectations: hard market is lasting longer than expected. In 2022, Fairfax grew net premiums written by 25% and delivered a better than expected CR of 94.7. 
• interest and dividend income: interest rates spike much higher than expected. And Fairfax just locked in higher rates moving from 1.2 year average duration Dec 31, 2021 to 2.5 years at March 31, 2023. 
• share of profit of associates: earnings from Fairfax’s collection of associate holdings increased much more than expected. This is expected to grow further in the coming years.
• all three 'buckets' are delivering much more earnings than expected - new records every year. Especially interest and dividends and share of profit of associates. 

Most importantly, 2023 operating earnings of $3.8 billion are expected to be the new baseline for Fairfax moving forward. 2024 and 2025 operating earnings should be able to grow from 2023 levels. In short, $3.8 billion in operating earnings will be D-U-R-A-B-L-E. This is the critical point that I think many investors are missing today.

 

So Fairfax’s stock price went up $200 over the past 15.5 months. Three unexpected asset sales delivered $60 after-tax to shareholders. That leaves us with $140. How much is an increase in operating earnings of $1.9 billion ($90/share pre-tax = $70/after-tax) worth to shareholders? Is it worth $140/share? It is worth much, much more than that. Because it is durable.

 

What is the better buy?

 

A.) Fairfax at $490/share at Dec 31, 2021 - knowing what was known then.

B.) Fairfax at $690/share at May 13, 2023 - knowing what we know now.

 

My choice is B. And it’s not even close.

 

Just like December 31, 2021, that big fish (called Fairfax) is once again staring investors right in the face. And guess what? It’s probably going to slip away from most investors for a second time. And in another couple of years they will think back to today and kick themselves. And the story of ‘the big fish that got away’ will get even bigger.

 

 

You make a compelling argument. My question is what are the potential scenarios (optimistic, pessimistic, realistic) after three years? What normalized level of earnings could we expect? From the Q1 conference call, and Jen's comments, it seems like earnings will be more susceptible to interest rates due to IFRS 17. 

Edited May 14, 2023 by keegomaster

[Viking]

13 hours ago, keegomaster said:

You make a compelling argument. My question is what are the potential scenarios (optimistic, pessimistic, realistic) after three years? What normalized level of earnings could we expect? From the Q1 conference call, and Jen's comments, it seems like earnings will be more susceptible to interest rates due to IFRS 17. 

@keegomaster other than very top-line, I do not spend a lot of time thinking about what might happen in 4 years and further out. For any company… not just Fairfax. There are simply too many moving parts to be able to have a strong opinion about granular things looking that far into the future. Who predicted 4 years ago that interest rates would spike to 5% in the US? No one. Who predicted in 2015 that a hard market in insurance would start in 2019? No one. 
 

What you are really asking is:

1.) do you trust management?

2.) how good is management?

 

And today i do trust management at Fairfax. And for the past couple of years their decision making and execution has been best in class in the P&C industry. (Time to state the obvious.)
 

Looking out 4 years, i expect total earnings at Fairfax to continue to grow. There will be puts and takes. Perhaps underwriting profit flatlines or even declines (if we get a full-on soft market). That will be made up elsewhere. Fairfax will be investing billions in each of the next three years. Those new investments will create significant additional value for shareholders looking out to year 4. 

 

In short, the management team will do what they are supposed to do: allocate capital well and grow value for shareholders.

Edited May 14, 2023 by Viking

[nwoodman]

Further speculation on the state of play for the approximate 60% stake in IDBI Bank that is up for grabs.  The current market cap is 572.35B INR =>US$7bn, so in round terms, Fairfax would need to trump up around $US4.5bn, a decent chunk of change.

  

https://www.thehindubusinessline.com/money-and-banking/kotak-vs-watsa-the-battle-for-acquiring-idbi-bank-intensifies/article66850311.ece

 

Based on the timeline in the article financial bids are scheduled for September

[MMM20]

[yesman182]

What is the best way to buy Fairfaix financial as a US stock holder? What are the considerations for the different shares? 

[Malmqky]

1 hour ago, yesman182 said:

What is the best way to buy Fairfaix financial as a US stock holder? What are the considerations for the different shares? 

OTC via FRFHF or just buy using the Toronto stock exchange.

[valuesource]

1 hour ago, yesman182 said:

What is the best way to buy Fairfaix financial as a US stock holder? What are the considerations for the different shares? 

You can Buy Fairfax Financial over-the-counter in the US.  For smaller quantities, this makes sense but I would probably bid for it.  Symbol FRFHF

[valuesource]

59 minutes ago, Malmqky said:

OTC via FRFHF or just buy using the Toronto stock exchange.

On US OTC FRFHF, bid close to the middle of the spread and look for the algos to kick in.  It's annoying on TMX as well but you just have to feel it out.

[nwoodman]

Recent interview with Prem.  Connection was a little sketchy, so it is somewhat fragmented.  Greece is going gangbusters, economy grew by 5+%.  Elections next month.  Eurobank divs likely to start next year.  Touches on some minor acquisitions they have made.  Also calls out the investments made by the major tech companies who have set up regional cloud infrastructure in Greece.  
 

 

 

[Dudley]

If the stock continues to not react to great results, I hope Prem drops the chase for IDBI Bank and focuses on buying back stock soon at these levels in earnest. At this point, it is a much better use of capital and aligns with his stated LT goals.

[TwoCitiesCapital]

18 minutes ago, Dudley said:

If the stock continues to not react to great results, I hope Prem drops the chase for IDBI Bank and focuses on buying back stock soon at these levels in earnest. At this point, it is a much better use of capital and aligns with his stated LT goals.

 

Isn't IDBI for Fairfax India? It's not competing for the same capital as Fairfax Financial's uses.

[Ghost]

Good day all,

 

FFH press release on May 11th had a BV for Dec 31 2022 of $762.  FFH press release on  Feb 16 2023 had a BV for Dec 31 2022 of $657.  Does anybody have a clear indication why the increase of roughly a $100?

 

May 11 2023

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).

https://www.fairfax.ca/news/press-releases/press-release-details/2023/Fairfax-Financial-Holdings-Limited-Financial-Results-for-the-First-Quarter/default.aspx

 

 

Feb 16 2023

Book value per basic share at December 31, 2022 was $657.68 compared to $630.60 at December 31, 2021 (an increase of 6.0% adjusted for the $10 per common share dividend paid in the first quarter of 2022).

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

 

 

 

[Malmqky]

2 minutes ago, Ghost said:

Good day all,

 

FFH press release on May 11th had a BV for Dec 31 2022 of $762.  FFH press release on  Feb 16 2023 had a BV for Dec 31 2022 of $657.  Does anybody have a clear indication why the increase of roughly a $100?

 

May 11 2023

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).

https://www.fairfax.ca/news/press-releases/press-release-details/2023/Fairfax-Financial-Holdings-Limited-Financial-Results-for-the-First-Quarter/default.aspx

 

 

Feb 16 2023

Book value per basic share at December 31, 2022 was $657.68 compared to $630.60 at December 31, 2021 (an increase of 6.0% adjusted for the $10 per common share dividend paid in the first quarter of 2022).

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

 

 

 

https://www.fairfax.ca/news/press-releases/press-release-details/2023/Fairfax-Financial-Holdings-Limited-Preliminary-Report-on-Effect-of-IFRS-17-on-Common-Shareholders-Equity/default.aspx

 

This should answer it!

[dartmonkey]

3 hours ago, TwoCitiesCapital said:

 

Isn't IDBI for Fairfax India? It's not competing for the same capital as Fairfax Financial's uses.

Yes, so it seems. Nothing to do with FIH.

 

While we're on the subject, it seems the federal and state governements would go from a combined 95% stake to 34%, which raises questions of whether they intend to maintain control. This article (https://www.vccircle.com/rbievaluates-fairfax-backed-bank-other-potential-bidders-for-idbi-bank) suggests that the answer is no, but can anyone translate into ordinary English what the last sentence means? :

 

The RBI is also conducting a "fit and proper evaluation", including extensive background and financial checks on the potential buyers, a crucial step before an investor is allowed to pick up stake in a local bank, the people added.

Potential investors have raised questions around the extent of government control in IDBI Bank after the divestment since it will retain a 15% stake and LIC, a government company, will have a 19% stake, two of the people said.

"The government does not intend to have any management control," one of the people said. "The government will take a call if a written submission to that effect is needed."

[Ghost]

2 hours ago, Malmqky said:

https://www.fairfax.ca/news/press-releases/press-release-details/2023/Fairfax-Financial-Holdings-Limited-Preliminary-Report-on-Effect-of-IFRS-17-on-Common-Shareholders-Equity/default.aspx

 

This should answer it!

 

Thank you, that is a 2.2 billion change in accounting treatment.   Does that imply in a large cat claim, the losses would be magnified with the new accounting methods?

[Daphne]

Short answer is likely yes however prem has said that Ffh will continue as if IFRs was not in place

[dartmonkey]

2 hours ago, Ghost said:

 

Thank you, that is a 2.2 billion change in accounting treatment.   Does that imply in a large cat claim, the losses would be magnified with the new accounting methods?

I hope some of the investment accounting experts here will answer, but in the meantime, I'll take a stab, and say yes.

 

Here is the somewhat opaque text issued by FFH:

 

The Company’s preliminary estimate of the effect of IFRS 17 on common shareholders’ equity is that it will increase common shareholders’ equity as at December 31, 2022 by approximately $2.2 billion (an increase in book value per share of approximately $94), primarily reflecting the introduction of discounting net claims reserves (approximately $4.7 billion, partially offset by a risk adjustment of approximately $1.7 billion for uncertainty related to the timing and amount of cash flows arising from non-financial risks), partially offset by the tax effect of the measurement changes and other of approximately $0.8 billion.

 

In other words, the major change is an increase in book value of $4.7 billion because of the discounting of net claims reserves. I suppose that a large cat claim COULD fall under that category, if the distribution of claims was a long time in the future. So a supercat happening today that Fairfax anticipated having to pay out $1b but only 10 years later would not result in an immediate charge of $1b to book value, but rather, an amount that corresponds to the discounted cash flows expected over the next 10 years - that could easily reduce it by half, I would think. So if the claim is routine (life insurance, say), the effect of discounting would be small, but for a claim far in the future (asbestos liabilities, for instance), it might almost make the claim disappear. That would be tantamount to recognizing some value for float.

[alexmiddle]

Most people on this thread are fairly optimistic on FFH's future, as am I since approximately 2018, but has anyone come across a short thesis or a negative write-up on Fairfax recently?  With all the positive results being announced, the stock really is not getting much attention still.  I couldn't find any article on BNN after the recent quarterly's were announced.  Fairfax does not seem to be finding its way into many hedge fund portfolios...  

[Bryan Wilmes]

Are your guys' brokers charging any type of fee to buy FRFHF? I've never had a fee for other OTC's that I've bought, but was charged $50 to buy Fairfax. 

[Parsad]

1 hour ago, alexmiddle said:

Most people on this thread are fairly optimistic on FFH's future, as am I since approximately 2018, but has anyone come across a short thesis or a negative write-up on Fairfax recently?  With all the positive results being announced, the stock really is not getting much attention still.  I couldn't find any article on BNN after the recent quarterly's were announced.  Fairfax does not seem to be finding its way into many hedge fund portfolios...  

 

In the short-term, the market is a voting machine.  In the long-term, it is a weighing machine. 

 

Let Prem do his thing and the market will eventually realize what is happening.  Always happens...as consistent as gravity! 

 

Just takes a bit of patience.  Cheers!

[Santayana]

19 minutes ago, Wilmesbm said:

Are your guys' brokers charging any type of fee to buy FRFHF? I've never had a fee for other OTC's that I've bought, but was charged $50 to buy Fairfax. 

Schwab charges me $6.95.