Fairfax 2023

[glider3834]

43 minutes ago, Viking said:

As i mentioned in my previous post, the closing of the Gulf Insurance Group (GIG) deal (Q4?) - boosting Fairfax’s ownership to 90% - will be an important growth driver of Fairfax’s 2024 results. 
 

GIG recently updated their web site. They added a bunch of new information. Below is the link to a 40 page report that provides a great overview of the company.

- https://www.gulfinsgroup.com/Frontend/EN/GIG-Corporate-Profile-ENG.pdf?download=false

 

Here are the financial highlights (2022):

• Net premiums written = $1.7 billion
• Underwriting surplus = $164 million
• Total Investments = $2.4 billion
• Shareholders equity = $748 milion
• Net profit = 125 million (Q1, 2023 = $34 million)

The purchase price of the 46% owned by Kipco is $860 million. However, the true cost to Fairfax is far less, due to the time value of money. Fairfax will pay $200 million at close and then 4 annual instalments of $165 million. If we use an 10% discount rate, the cost to purchase Kipco’s stake when it closes in Q4 is closer to $700 million ($200+$149+$134+$120+$108).
 

This is a good example of solid capital allocation on the part of Fairfax. They are paying a premium for quality. That is interesting. They are also playing the long game with this purchase as it is a very strategic purchase for them that solidifies their presence in the MENA region. It is also anther example of using their current robust cash flow to take out a partner in a business they understand very well.

 

good point viking on PV of this transaction

 

I would expect it would be a net positive for Fairfax's underwriting profitability & overall CR

 

[SafetyinNumbers]

2 hours ago, Viking said:

As i mentioned in my previous post, the closing of the Gulf Insurance Group (GIG) deal (Q4?) - boosting Fairfax’s ownership to 90% - will be an important growth driver of Fairfax’s 2024 results. 
 

GIG recently updated their web site. They added a bunch of new information. Below is the link to a 40 page report that provides a great overview of the company.

- https://www.gulfinsgroup.com/Frontend/EN/GIG-Corporate-Profile-ENG.pdf?download=false

 

Here are the financial highlights (2022):

• Net premiums written = $1.7 billion
• Underwriting surplus = $164 million
• Total Investments = $2.4 billion
• Shareholders equity = $748 milion
• Net profit = 125 million (Q1, 2023 = $34 million)

The purchase price of the 46% owned by Kipco is $860 million. However, the true cost to Fairfax is far less, due to the time value of money. Fairfax will pay $200 million at close and then 4 annual instalments of $165 million. If we use an 10% discount rate, the cost to purchase Kipco’s stake when it closes in Q4 is closer to $700 million ($200+$149+$134+$120+$108).
 

This is a good example of solid capital allocation on the part of Fairfax. They are paying a premium for quality. That is interesting. They are also playing the long game with this purchase as it is a very strategic purchase for them that solidifies their presence in the MENA region. It is also anther example of using their current robust cash flow to take out a partner in a business they understand very well.

 

 

Great posts as always Viking! Thank you! 
 

I like that GIG might earn the entirety of the instalment payments over the payment period. 
 

I really appreciate how cleverly they structure deals. Fairfax has so much leverage that just earning the risk free rate on extra capital supports a 15% ROE. Anything that defers payments like GIG or the TRS is hugely accretive.

[newtovalue]

thank you for detailed analysis Viking!

 

Does anyone on the board have insight into FFH's hurricane exposure? a few articles bubbling up about this year being active for hurricanes

[Haryana]

4 hours ago, newtovalue said:

thank you for detailed analysis Viking!

 

Does anyone on the board have insight into FFH's hurricane exposure? a few articles bubbling up about this year being active for hurricanes

https://www.businessinsider.com/personal-finance/homeowners-insurance-made-hurricane-season-florida-less-stressful-2023-7

No particular insight into FFH's hurricane exposure but it is likely nothing to see there, business as usual.

Hurricane fears will keep bubbling every year, some years they will underestimate, some years overestimate.

Those fears can present more opporutunities to get more in on the asset when their stocks gets depressed.

Similar to tobacco companies, the demand for insurance is inelastic. People will pay regardless of price.

Governments keep increasing taxes on tobacco and the hurricanes keep getting worse due to climate change.

Both the tobacco companies and the insurance companies keep increasing their prices, revenues and profit.

For insurance companies there is the added advantage of increasing float and increasing investment gains.

[gfp]

I'm not sure comparing the pricing power of tobacco companies with the pricing power of insurance companies is as simple as that.  Insurance companies are price takers, despite the current point in the cycle making it look otherwise to some.

[Haryana]

 

You are correct. That was an oversimplification and the comparison is quite far fetched. Still, a point to ease the fears.

 

Insurance companies are price takes, however, the worse the hurricanes, the higher the prices they all shall be taking.

 

Here again, the management becomes more important, companies with better management will get extra advantage.

 

[Haryana]

 

I never like articles on the Motley Fool but this one is a bit better.

 

https://www.fool.ca/2023/07/12/prem-watsa-is-back-why-fairfax-financial-stock-has-room-to-run/

 

"Investors getting in at these prices may need to roll with the punches, even if the stock is overdue for another one of its 10% dips. In any case, Prem Watsa has proven that he still has plenty of skill. And as a recession comes rolling in, expect Fairfax to roll with the punches. Fairfax and Watsa are back, and investors should really take notice, even if shares are near an all-time high."

 

[Thrifty3000]

@Viking

 

Amazing analysis. You’re a saint for doing this.

 

You mentioned your “big ‘miss’ is related to capital allocation”.
 

If we assume they will net $9.5 billion over the next 3 years, then it looks to me like at least half of that is already earmarked for things like:

 

- buying out the minority stakes of some of their existing portfolio companies.

- retention/reinvestment by associates.

- paying common share dividends.

- buying GIG.

 

After paying for the fairly easily predictable items like those above, what do we have left, maybe $3 or $4 billion?

 

If they buy back another 1.5 million shares at an average price of $900 per share, then we’re looking at another $1.35 billion spend.

 

I don’t think there is too much to be concerned about with the uses listed so far.

 

So, I assume that leaves them with maybe a couple billion dollars to play with over the next 3 years for which we can’t easily predict the use. That’s where the fun stuff happens.

 

Edited July 16, 2023 by Thrifty3000

[Xerxes]

https://podcasts.apple.com/ca/podcast/the-business-brew/id1540847053?i=1000621753971
 

[Jaygo]

Kiss of death, sorry BB if your on here lol

[SafetyinNumbers]

2 hours ago, Xerxes said:

https://podcasts.apple.com/ca/podcast/the-business-brew/id1540847053?i=1000621753971
 

Thanks for sharing! I’m really grateful to Bill for having Charlie and I on the podcast. I’m really lucky to know both of them and call them friends. 
 

Please share any feedback. It’s always appreciated! 

[Xerxes]

59 minutes ago, SafetyinNumbers said:

Thanks for sharing! I’m really grateful to Bill for having Charlie and I on the podcast. I’m really lucky to know both of them and call them friends. 
 

Please share any feedback. It’s always appreciated! 

@SafetyinNumbers

thanks for taking the time in making the episode. I ll be listening to it soon. 
 

@Jaygo

lol … BB is doing way more than me connecting the investment community. So I ll give him that. 

[Jaygo]

Yeah he is doing great work and I am a fan of his show. Frankly i should have not said that. If you can’t say something nice, don’t say anything at all! 
 

I guess I kind of see podcasts as a placeholder for what’s hot and popular. BB has a discussion about FFH and it coincides with lots of COBF member buying FFH

 

It’s was energy last year and lumber the year before. 

[SafetyinNumbers]

1 hour ago, Jaygo said:

Yeah he is doing great work and I am a fan of his show. Frankly i should have not said that. If you can’t say something nice, don’t say anything at all! 
 

I guess I kind of see podcasts as a placeholder for what’s hot and popular. BB has a discussion about FFH and it coincides with lots of COBF member buying FFH

 

It’s was energy last year and lumber the year before. 

Thankfully, Fairfax is not a commodity but that still doesn’t mean we won’t have another drawdown at any moment. Investing to avoid drawdowns is hard and I think it’s part of the reason we are stuck near a $1000. Today was the 6th time through. Maybe the sellers are finally done or we’ll chop away all summer. Ultimately, it shouldn’t matter in the long term.

[TwoCitiesCapital]

4 hours ago, SafetyinNumbers said:

Thankfully, Fairfax is not a commodity but that still doesn’t mean we won’t have another drawdown at any moment. Investing to avoid drawdowns is hard and I think it’s part of the reason we are stuck near a $1000. Today was the 6th time through. Maybe the sellers are finally done or we’ll chop away all summer. Ultimately, it shouldn’t matter in the long term.

 

Seasonally it's the rough part for Fairfax/insurance too. Its also fighting some technicals like being overbought for so long on basics like RSI and etc

 

Obviously anything could happen, but I think it's more likely than not we get a pullback. Have been waiting to repurchases some shares I trimmed at $730-750 USD sub-$700. 

[SafetyinNumbers]

43 minutes ago, TwoCitiesCapital said:

 

Seasonally it's the rough part for Fairfax/insurance too. Its also fighting some technicals like being overbought for so long on basics like RSI and etc

 

Obviously anything could happen, but I think it's more likely than not we get a pullback. Have been waiting to repurchases some shares I trimmed at $730-750 USD sub-$700. 

You might be absolutely right but I think there is a chance the quarter is good enough that we don’t revert back under 0.82x book despite technical conditions. I can’t say I hope you get a chance to buy those shares back cheaper!

[TwoCitiesCapital]

Just now, SafetyinNumbers said:

You might be absolutely right but I think there is a chance the quarter is good enough that we don’t revert back under 0.82x book despite technical conditions. I can’t say I hope you get a chance to buy those shares back cheaper!

 

It's only been a slight trim. I still do well of we continue upward, but tryna finesse more shares and "make my own dividend" with these swing trades. 

 

In the meantime the cash gets deployed into names that are oversold and often times they get a pop while I'm waiting for the other to drop. Don't keep detailed enough records to know what the alpha is across all trades, but wouldn't be surprised if it added 2-3% per year in portfolio return while increasing my shares in longer term positions. 

[SafetyinNumbers]

11 minutes ago, TwoCitiesCapital said:

 

It's only been a slight trim. I still do well of we continue upward, but tryna finesse more shares and "make my own dividend" with these swing trades. 

 

In the meantime the cash gets deployed into names that are oversold and often times they get a pop while I'm waiting for the other to drop. Don't keep detailed enough records to know what the alpha is across all trades, but wouldn't be surprised if it added 2-3% per year in portfolio return while increasing my shares in longer term positions. 

That’s awesome. My trader instincts have diminished significantly since leaving the bank. I don’t even try any more. 

[MMM20]

What if the hard market reaccelerates and @Viking's '24/'25 numbers are way too low?

 

https://www.wsj.com/articles/facing-big-storm-losses-insurers-aim-to-boost-rates-f70211d6?st=mu1hv017qtasvf1&reflink=desktopwebshare_permalink

 

 

Edited July 21, 2023 by MMM20

[Blugolds]

1 hour ago, MMM20 said:

What if the hard market reaccelerates and @Viking's '24/'25 numbers are way too low?

 

https://www.wsj.com/articles/facing-big-storm-losses-insurers-aim-to-boost-rates-f70211d6?st=mu1hv017qtasvf1&reflink=desktopwebshare_permalink

 

 

 

Was just talking about this with a buddy. I have a cabin up north and last week they were sending me video of a hail storm, golf ball size, literally bouncing off the ground, deck, driveway, it was insane, ground was covered. Everyone in area got hit....then again just yesterday..same thing. 

 

2 crazy storms within a week or so of each other. My buddy had claim for siding, windows, fascia and roof repair, also both vehicles totaled from hail.  

 

I guess upshot for insurance companies is at least storms were consecutive, once claims filed, cant total an already totaled car LOL

[UK]

https://www.barrons.com/articles/travelers-stock-climate-change-insurance-investing-6a8535e1

 

Unusually high catastrophe losses left The Travelers , a New York-based property and casualty insurer, in the red last quarter, but the stock rose nevertheless. That underscores a misperception about insurance stocks. Investors aren’t betting on the weather and the damage it brings, which can fluctuate drastically from year to year even as climate change makes storms more intense. What matters is how insurers charge for and manage that risk over longer periods. Although insurance companies’ balance sheets have been hammered by increasingly frequent and severe natural catastrophes in recent years, their stocks haven’t plunged. Insurance shares in the S&P 500 index are down about 1% since the beginning of the year, but up by 13% from a year ago. Investors aren’t losing faith in the group because insurers have been able to boost premium rates, taking in revenue that they will invest to cover future losses. Many have also been pulling out of risky markets, including California and Florida, where they couldn’t charge high enough rates to make profits, given the storms and wildfires that plague those states. The Travelers (TRV) is an example of how it is playing out. On Thursday, the company reported a loss of $14 million in its second quarter, or seven cents per share, a sharp fall from the $551 million in income, or $2.27 per share, it recorded in the same quarter last year.  The red ink was mainly due to higher catastrophe losses from “numerous severe wind and hail storms in multiple states,” according to the company. In the second quarter, the firm paid $1.5 billion in catastrophe damages, twice as much as the $746 million in the year-earlier period. “We had six events surpassed the $100 million mark in Q2, the most ever for a single quarter since we began disclosing the table in 2013,” said CFO Daniel Frey on a call to discuss the results with investors. Nevertheless, the stock gained 1.8% in Thursday trading as investors were more focused on the firm’s net written premiums, which grew 14% from last year to $10.3 billion. Net written premiums—the amount collected minus payments for reinsurance—in the business insurance segment increased by 18%, partially driven by higher rates for renewed policies. And despite the higher prices, retention was strong at 88%, according to the firm. In the personal insurance line, net written premiums were 13% higher than in the year-earlier quarter.

[Thrifty3000]

Sounds like insurers are taking a beating. I couldn’t believe how much Travelers jacked up my rate this year. 40% increase on a homeowner policy (only increased coverage by 20%). I started to shop it but got distracted with vacation.

[Thrifty3000]

On 7/16/2023 at 10:20 AM, Thrifty3000 said:

@Viking

 

Amazing analysis. You’re a saint for doing this.

 

You mentioned your “big ‘miss’ is related to capital allocation”.
 

If we assume they will net $9.5 billion over the next 3 years, then it looks to me like at least half of that is already earmarked for things like:

 

- buying out the minority stakes of some of their existing portfolio companies.

- retention/reinvestment by associates.

- paying common share dividends.

- buying GIG.

 

After paying for the fairly easily predictable items like those above, what do we have left, maybe $3 or $4 billion?

 

If they buy back another 1.5 million shares at an average price of $900 per share, then we’re looking at another $1.35 billion spend.

 

I don’t think there is too much to be concerned about with the uses listed so far.

 

So, I assume that leaves them with maybe a couple billion dollars to play with over the next 3 years for which we can’t easily predict the use. That’s where the fun stuff happens.

 

 

Circling back to forecasting what Fairfax will likely do with those $9.5 billion of profits rolling in over the next 3 years, here are some more specifics in order of predictability.

 

Purchasing GIG: $860 million

 

Common share dividends: $660 million

 

Options to purchase minority stakes and Riverstone portfolio: $2.675 billion (see summary below)

 

Total: $4.195 billion

 

 

 

 

For reference: summary of options to purchase:

 

- Allied: FFH Can buy 17.1% by 9/24. They bought 12% for $733.5 in 2022. I assume the 17.1% will cost around $1.1 billion.

 

- Odyssey Re: FFH can buy 10% for $900 mil beginning 1/25.

 

- Brit: FFH can buy 13.9% for $375 mil beginning 10/23.

 

- Riverstone: FFH can buy/sell certain securities in the Riverstone portfolio. I’m not clear on all the puts and takes on this one so I’m just earmarking $300 mil for it.

[MMM20]

On 7/21/2023 at 8:44 AM, Thrifty3000 said:

Sounds like insurers are taking a beating. I couldn’t believe how much Travelers jacked up my rate this year. 40% increase on a homeowner policy (only increased coverage by 20%). I started to shop it but got distracted with vacation.

 

Maybe this should be a DM, but check out https://www.credible.com/home-insurance - no spam calls, first heard about it from Mr Money Mustache https://www.mrmoneymustache.com/mmm-recommends/credible/ - they handled the shopping around part and quite literally saved me ~15% by switching to GEICO (—> Liberty Mutual).
 

No affiliation but delete if too tangential / off topic...

 

 

Edited July 23, 2023 by MMM20

[Thrifty3000]

1 minute ago, MMM20 said:

 

Maybe this should be a DM, but check out https://www.credible.com/home-insurance - no spam calls, first heard about it from Mr Money Mustache https://www.mrmoneymustache.com/mmm-recommends/credible/ - they handled the shopping around part and quite literally saved me ~15% by switching to GEICO (well, Liberty Mutual)

Awesome! Thanks. Will definitely check it out.