Fairfax 2023

[StubbleJumper]

2 hours ago, giulio said:

FFH floating rate preferred shares are trading at >10% yield, possible redemption in dec 24/dec 25.

Canadian 3 month t-bill rate + spread (2.5-3%), resetting quarterly.

Bradstreet bought these in dec 2022.

The probability that they get called is low IMO, still looks like a good deal.

What am I missing? 

 

The prefs are great for certain people.  If you are a Canadian tax filer with a modest taxable income, in certain circumstances, you might end up paying no income tax at all on the ~10% dividend, which makes for a pretty attractive net return.  And then if interest rates should happen to decrease, you could also be in line for a modest capital gain to top things off.   So, they are definitely worth looking at, especially for a particular subset of Canadian taxpayers.

 

The prefs do, however, have a few issues. The market is dominated by unsophisticated retail investors so when the market gets a little choppy, the prefs can experience irrational price swings.  If you happen to need to repatriate your capital during one of those irrational periods, you could face a capital loss.  Secondly, the dividends reset every five years, so the double-digit return might be time limited if interest rates decline.  Thirdly, a foreigner will be subject to a considerable withholding tax on the dividends, unless Canada has a tax treaty with the foreign country that might reduce the withholding tax.  Fourthly, the prospectus for the prefs allows FFH to redeem them when it is attractive for the company, and those situations are generally not attractive for the investor, but there is no retraction provision allowing the investor to retract them with conditions are favourable for the investor (and unfavourable for FFH).  Finally, as with all prefs, you are subject to risk of financial failure by FFH and you might not be adequately compensated for that risk because your upside is capped with a pref (Let's be honest with ourselves.  Prem seems comfortable with significant financial leverage and has come close to driving FFH into a wall on a couple of occasions).

 

A Canadian investor looking to exploit our income tax provisions for dividends paid by Canadian Controlled Private Corporations might look at FFH prefs and be attracted at this stage.  But he should equally be looking at the common shares of our chartered banks, as outfits like the Canadian Imperial Bank of Commerce and the Bank of Nova Scotia currently sport 7% dividend yields and those divvies are bumped up a shade twice per year.  At the end of five years (the FFH reset period) it is likely that the yield on purchase price for one of those banks would be pretty similar to the 10% yield on the FFH prefs.  And those banks are the most liquid of Canadian equities and face virtually no risk of financial failure by the underlying company.

 

At this point, the prospects for FFH common shares over the next few years are so attractive that someone who doesn't have a specific income tax motivation would probably just buy the common instead of the FFH prefs.  A foreigner with no income tax advantage would almost certainly buy the common....

 

 

SJ

[giulio]

@MMM20, @StubbleJumper thanks for the feedback!  

The relative attractiveness of the subordinate shares over the preferreds is what makes me think the probability of redemption is low.

I looked at them but decided to pass since I would be double-taxed both in Canada and Italy.

 

On to the next idea!

 

 

 

 

 

 

[UK]

4 hours ago, MMM20 said:

 

Are those prefs a better risk/reward than the common at a ~18-20% earnings yield?

 

You know, it is very good question to ask and not only vs preferreds. But if one to agree with you yield asumption (which I more or less do), it is really hard for something else to compete with it (or even to clear this hurdle). Even such seemingly cheap stocks, like M or C or something from Oil and Gas, or you name it, they are more or less as cheap, yet I would argue, that FFH is of a much higher quality and much better for a long term holding. 

[Thrifty3000]

On 10/8/2023 at 12:36 AM, Viking said:

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

• Interest rate changes drive this bucket. My estimates here could be a little messed up. Given I am forecasting interest rates to remain about where they are today, I am leaving this number the same over the forecast period (at my estimate for June 30, 2023).

@Viking why are you adding $480 annually for this adjustment? If you're assuming interest rates remain flat wouldn't that make the annual adjustment for this $0? And, wouldn't that reduce the EPS by around $20 per share in 2024 and 2025? 

[SafetyinNumbers]

2 hours ago, Thrifty3000 said:

@Viking why are you adding $480 annually for this adjustment? If you're assuming interest rates remain flat wouldn't that make the annual adjustment for this $0? And, wouldn't that reduce the EPS by around $20 per share in 2024 and 2025? 

I know you asked Viking but I think about this a lot so I hope you don’t mind my thoughts.
 

My understanding with IFRS 17 is as long as interest rates aren’t zero there will be some sort of adjustment. The reported combined ratio does not include any impact for discounting reserves. But every quarter, the existing reserve balance accretes and any reserves for new policies have to be discounted. If rates are flat or going up, that should be a sizeable benefit every quarter. If rates are going down, the reserve balance will be revalued higher but the discounting of the new policies will still be positive. 
 

I think most analysts are ignoring this and that’s part of why their earnings estimates are too low. Intact breaks out the discounted combined ratio (see below) and for them in the first half it was a 440bps difference. I’m not sure what the right number is for Fairfax but it’s not zero. That being said at some point in the future if rates fall fast enough, the discounted combined ratio might be higher than the reported combined ratio.

 

[sleepydragon]

why is Fairfax down today? is there a downgrade or something? or is it Tbill yield is down?

[Santayana]

I wouldn't bother trying to understand short term moves in Fairfax stock.  But maybe just some profit taking after hitting ATHs on Friday?

Edited October 10, 2023 by Santayana

[Thrifty3000]

2 hours ago, SafetyinNumbers said:

I know you asked Viking but I think about this a lot so I hope you don’t mind my thoughts.
 

My understanding with IFRS 17 is as long as interest rates aren’t zero there will be some sort of adjustment. The reported combined ratio does not include any impact for discounting reserves. But every quarter, the existing reserve balance accretes and any reserves for new policies have to be discounted. If rates are flat or going up, that should be a sizeable benefit every quarter. If rates are going down, the reserve balance will be revalued higher but the discounting of the new policies will still be positive. 
 

I think most analysts are ignoring this and that’s part of why their earnings estimates are too low. Intact breaks out the discounted combined ratio (see below) and for them in the first half it was a 440bps difference. I’m not sure what the right number is for Fairfax but it’s not zero. That being said at some point in the future if rates fall fast enough, the discounted combined ratio might be higher than the reported combined ratio.

 

 

Ok, but if you go back to @Viking's latest model/explanation you can see the same $480 mil added to estimated income every year (circled in red)...

 

 

My understanding is adding $480 mil each year would require you to assume interest rates would increase each year. However, in @Viking's commentary he states he is assuming interest rates will remain flat...

 

 

Therefore, it sounds to me like he should have added the $480 mil to 2023, and then assumed adjustments of $0 for that line item in 2024 and 2025, which would result in reduced per share earnings estimates of roughly $15 to $20 per year in those two years.

Edited October 10, 2023 by Thrifty3000

[SafetyinNumbers]

1 hour ago, Thrifty3000 said:

 

Ok, but if you go back to @Viking's latest model/explanation you can see the same $480 mil added to estimated income every year (circled in red)...

 

 

My understanding is adding $480 mil each year would require you to assume interest rates would increase each year. However, in @Viking's commentary he states he is assuming interest rates will remain flat...

 

 

Therefore, it sounds to me like he should have added the $480 mil to 2023, and then assumed adjustments of $0 for that line item in 2024 and 2025, which would result in reduced per share earnings estimates of roughly $15 to $20 per year in those two years.

I want to make it clear I’m not an insurance expert, my MAcc degree is 23 years old and I let my CA/CPA expire a few years ago to save on the fees!

My premise is that as long as interest rates are positive and rates are unchanged, the discounted combined ratio will be lower than the undiscounted combined ratio assuming a growing business. I assume when a policy is sold, premiums are collected and reserves are set aside. If those reserves are discounted, the underwriting profit is by definition higher all else being equal and that should happen every quarter. The quarterly offset, however, is the reserve balance must also accrete at the same discount rate. 
 

Before IFRS17, in order to model underwriting income, an analyst will most likely estimate a combined ratio based on the trend in the reported undiscounted combined ratio. After, IFRS17 that’s still all Fairfax is giving us explicitly so that’s still how underwriting income is being modelled. But there is a plug needed. I don’t know if $480m is a fair estimate.
 

If the discounted combined ratio is 300bps lower than the reported combined ratio and Fairfax writes $25b in policies, does that mean $750m in additional profits? In theory that includes any accretion from the reserve balance. I’m not sure at all but it makes sense to me. 

 

 

 

Edited October 11, 2023 by SafetyinNumbers

[Viking]

9 hours ago, Thrifty3000 said:

@Viking why are you adding $480 annually for this adjustment? If you're assuming interest rates remain flat wouldn't that make the annual adjustment for this $0? And, wouldn't that reduce the EPS by around $20 per share in 2024 and 2025? 

@Thrifty3000 I don’t think i can give a better explanation than @SafetyinNumbers has already provided. I would appreciate others providing their thoughts  - that CofBF collective wisdom thing. 
 

‘My estimate here could be a little messed up.’ Bottom line, i am still learning about this bucket. It will take me a few more quarters to better understand the build and see how this number evolves at Fairfax. As i learn more i will update my forecasts.

Edited October 11, 2023 by Viking

[UK]

2 hours ago, Viking said:

@Thrifty3000 I don’t think i can give a better explanation than @SafetyinNumbers has already provided. I would appreciate others providing their thoughts  - that CofBF collective wisdom thing. 
 

‘My estimate here could be a little messed up.’ Bottom line, i am still learning about this bucket. It will take me a few more quarters to better understand the build and see how this number evolves at Fairfax. As i learn more i will update my forecasts.

 

I think we already have discussed this before and I definitely can not claim that SafetyNumbers is not right on this, since I do not understand this myself completely (and who does?), but my initial understanding on this was in line with Thrifty3000's, meaning that large recurring gains from this item would be produced only if rates increase further substantially. But it seems it also depends on the change of net reserves, as SafetyNumbers has stated, so in the end it seems it depends on two variables: discount rate and net reserve change, and the final result for any period will be impacted by both. So I think this probably means, that such large initial benefit from applying this for the first time will not be repeated in the future, unless rates moves up substantially, despite of reserves growing at a steady pace. In such case (no rate change, reserves growing steady), my guess, the impact would still be positive, but way smaller?

 

From 2q CC: 

 

Under IFRS 17, our net earnings are affected by the discounting of our insurance liabilities and the application of a risk adjustment. In the second quarter of 2023, our net earnings benefited $221 million pre-tax from the effects of discounting losses occurring in the current quarter, changes in the risk margin, the unwinding of the discount from previous years and changes in the discount rate on prior year liabilities. As interest rates move up and down, we will see positive or negative effects on earnings from discounting.

 

From 1q CC:

Tom MacKinnon

Great. Yes, Jen, I was just wondering, the things that really impact IFRS 17, the change in the risk adjustment, the unwind of the discount, the build of the discount and the change in the discount rate. So, if we kind of had a flat interest rate environment and pretty well steady state with respect to your growth. Would all of this noise be pretty minimal, like what kind of conditions would make this noise show up more to the positive or actually show up more to the negative?

Jennifer Allen

Yes. Sure. It's a good question, Tom. So, the way I think if you're in a steady state, if your underlying net reserves from a risk profile duration does not change, then as you unwind your discounting that you don't have a change in your discount rate, it should really be offset and really don't see a huge impact. The other side of it is, your risk adjustment would be steady state, you would be releasing your risk adjustment on your old book, but you would also be setting up the same risk adjustment on your new book. So it's only when your book grows, so if your net reserve starts to grow, you'll start to get that net benefit through again, if it shrinks, it would be a negative impact to your total portfolio.

Tom MacKinnon

And then on the change in the discount rate, is that just generally, if we have a flat interest rate environment, then we wouldn't get that noise as well, I assume.

Jennifer Allen

Correct.

 

 

[giulio]

The accounting changed but the economic substance did not. I think it is not worth it to focus on the impact of discounting/interest rates. it will move up and down, like mark-to-market investment gains (which should be excluded from earnings and not projected forward). 

I try to measure look-through earnings instead.

I try to understand if they are writing profitable business and what CR will be over a cycle.

I think Mr. Watsa said on CC that IFRS 17 will not have any impact on the way FFH conducts business, so let the equity research analysts deal with this mess in their models!

focus on the business, don't let the accounting obfuscate economic reality.

 

[sleepydragon]

reading Fairfax's annual letters last night. I am new to this stock.. but they are writing insurance everywhere in the world -- like Indonesia etc.. Do they really know what risks they are taking on? It makes me a bit hard to sleep at night. 

[UK]

41 minutes ago, giulio said:

The accounting changed but the economic substance did not. I think it is not worth it to focus on the impact of discounting/interest rates. it will move up and down, like mark-to-market investment gains (which should be excluded from earnings and not projected forward). 

I try to measure look-through earnings instead.

I try to understand if they are writing profitable business and what CR will be over a cycle.

I think Mr. Watsa said on CC that IFRS 17 will not have any impact on the way FFH conducts business, so let the equity research analysts deal with this mess in their models!

focus on the business, don't let the accounting obfuscate economic reality.

 

 

Well, I agree, but if you still want to model any future EPS/BV, as Viking does, you have to decide what to do with this item:). Perhaps to stay conservative one can omit it altogether. Look through earnings is an alternative/different way to look at investment portfolio,  I agree it may be better in some respects, but maybe not for EPS estimate.

 

Edited October 11, 2023 by UK

[StubbleJumper]

7 minutes ago, sleepydragon said:

reading Fairfax's annual letters last night. I am new to this stock.. but they are writing insurance everywhere in the world -- like Indonesia etc.. Do they really know what risks they are taking on? It makes me a bit hard to sleep at night. 

 

 

When they write policies in Indonesia or Brazil, they are not doing so from headquarters in Toronto!  It is almost always a local subsidiary that does the underwriting in those countries.  In general, those local subsidiaries have been in operation for many years (decades!) and know the situation on the ground very well.  FFH has bought several of those insurance companies around the world.

 

There is an argument that owning several foreign subs might make you actually sleep better.  Something bad might happen in Indonesia, but if that occurs, it's unlikely to be accompanied simultaneously by bad news in South Africa, Brazil or Singapore.  The international subs are pretty geographically diverse.

 

 

SJ

[returnonmycapital]

On 10/9/2023 at 6:49 AM, giulio said:

FFH floating rate preferred shares are trading at >10% yield, possible redemption in dec 24/dec 25.

Canadian 3 month t-bill rate + spread (2.5-3%), resetting quarterly.

Bradstreet bought these in dec 2022.

The probability that they get called is low IMO, still looks like a good deal.

What am I missing? 

I'm curious about these variable rate prefs., especially the Series D & F which are redeemable in 447 days (1.2 yrs) and 537 days (1.5 yrs), respectively. Using current yield, they offer 10.8% and 11.2%, respectively. At par, they currently cost Fairfax 8.3% and 7.3%, respectively. Their dividends are paid with after-tax earnings, making them closer to 10% cost to FFH on a bond-equivalent basis. Those levels compare poorly to interest cost on FFH borrowings and I challenge those who would suggest that FFH assets will return higher over the next year or so. This is expensive capital. Is there something that I am missing? Why wouldn't a rational FFH redeem them?

 

I suppose the answer is that we don't know that things will remain equal in one year's time. But in the meantime we clip attractive cash "coupons" at preferential tax rates (for Canadian tax residents) and if things do look somewhat like today in one year's time, we could very well see a redemption and that would equate to a "yield to maturity" of 36% and 48% per annum, respectively. I know of no investment currently offering that level of yield/YTM combination, let alone one that is money-good.

 

I am making assumptions: That things don't change much and that FFH acts rationally. I see those as perhaps a better risk/reward than on the common.   

[StubbleJumper]

5 minutes ago, returnonmycapital said:

I'm curious about these variable rate prefs., especially the Series D & F which are redeemable in 447 days (1.2 yrs) and 537 days (1.5 yrs), respectively. Using current yield, they offer 10.8% and 11.2%, respectively. At par, they currently cost Fairfax 8.3% and 7.3%, respectively. Their dividends are paid with after-tax earnings, making them closer to 10% cost to FFH on a bond-equivalent basis. Those levels compare poorly to interest cost on FFH borrowings and I challenge those who would suggest that FFH assets will return higher over the next year or so. This is expensive capital. Is there something that I am missing? Why wouldn't a rational FFH redeem them?

 

I suppose the answer is that we don't know that things will remain equal in one year's time. But in the meantime we clip attractive cash "coupons" at preferential tax rates (for Canadian tax residents) and if things do look somewhat like today in one year's time, we could very well see a redemption and that would equate to a "yield to maturity" of 36% and 48% per annum, respectively. I know of no investment currently offering that level of yield/YTM combination, let alone one that is money-good.

 

I am making assumptions: That things don't change much and that FFH acts rationally. I see those as perhaps a better risk/reward than on the common.   

 

Yes, those prefs are redeemable and not retractable.  So, like all such prefs, that means that FFH can redeem them in situations that are attractive to the company.  But, how do they redeem them?  It requires cash at the holding company level to do so.

 

What is the hierarchy of uses for cash (capital) available at the holdco?  Well, FFH needs to use some cash:

 

-to fund the holdco's operations,

-pay the annual US$10/sh dividend

-pay interest on the large holdco debt

-perhaps it might wish to buy a new subsidiary (or a portion of a subsidiary),

-it might want to repay some debt

-it might want to add cash/capital to an insurance sub so that it can underwrite more business

-or, as you said, it might want to redeem some or all of its outstanding preferreds.

 

At the end of Q2 the holdco had about US$600m of cash and liquid securities available.  It has an untapped US$2B revolving credit faciltiy.  It could float more bonds/notes.  It could consider sending larger dividends from its insurance subs to the holdco.  But, however you look at it, the FFH holdco is not currently swimming in cash, nor is it likely to be swimming in cash during 2024.

 

When considering its capital allocation for 2024, FFH will definitely look at all potential sources and uses of capital and rank them in a hierarchy.  As you noted, they could get a ~10% pre-tax "return" by redeeming the series D and F.  But, they could probably get an even higher return by repurchasing OMERS' minority position in Odyssey Re.  They could probably get a better return by repurchasing the common shares at the current valuation of ~1x BV.  In short, there are many places where they can obtain a similar return to redeeming the prefs.

 

Given the many possible uses of cash/capital, I don't expect to see a penny dedicated to redeeming prefs during 2024 or 2025.  In fact, as a common shareholder, I would be furious if they redeem those prefs for $25/sh during 2024 or 2025 when they can simply make open market purchases under the NCIB right now at a significant discount to the redemption price.

 

 

SJ

[returnonmycapital]

1 hour ago, StubbleJumper said:

 

Yes, those prefs are redeemable and not retractable.  So, like all such prefs, that means that FFH can redeem them in situations that are attractive to the company.  But, how do they redeem them?  It requires cash at the holding company level to do so.

 

What is the hierarchy of uses for cash (capital) available at the holdco?  Well, FFH needs to use some cash:

 

-to fund the holdco's operations,

-pay the annual US$10/sh dividend

-pay interest on the large holdco debt

-perhaps it might wish to buy a new subsidiary (or a portion of a subsidiary),

-it might want to repay some debt

-it might want to add cash/capital to an insurance sub so that it can underwrite more business

-or, as you said, it might want to redeem some or all of its outstanding preferreds.

 

At the end of Q2 the holdco had about US$600m of cash and liquid securities available.  It has an untapped US$2B revolving credit faciltiy.  It could float more bonds/notes.  It could consider sending larger dividends from its insurance subs to the holdco.  But, however you look at it, the FFH holdco is not currently swimming in cash, nor is it likely to be swimming in cash during 2024.

 

When considering its capital allocation for 2024, FFH will definitely look at all potential sources and uses of capital and rank them in a hierarchy.  As you noted, they could get a ~10% pre-tax "return" by redeeming the series D and F.  But, they could probably get an even higher return by repurchasing OMERS' minority position in Odyssey Re.  They could probably get a better return by repurchasing the common shares at the current valuation of ~1x BV.  In short, there are many places where they can obtain a similar return to redeeming the prefs.

 

Given the many possible uses of cash/capital, I don't expect to see a penny dedicated to redeeming prefs during 2024 or 2025.  In fact, as a common shareholder, I would be furious if they redeem those prefs for $25/sh during 2024 or 2025 when they can simply make open market purchases under the NCIB right now at a significant discount to the redemption price.

 

 

SJ

Perhaps I'm thinking incorrectly, but I think of assets and the capital backing those assets in terms of spread. Assets need to have a positive spread over the capital backing them. Given the situation currently, FFH is showing a materially negative spread on their variable rate preferred capital. Should the situation continue, it would seem rational to exit that situation. I agree that it is best to do so in the open market, given the current discount to par prices but if they come right up to the date of redemption and there is still some variable-rate preferred outstanding on a negative spread, I'm not sure that I'd be furious with management if they redeemed.

[Thrifty3000]

8 hours ago, UK said:

Tom MacKinnon

And then on the change in the discount rate, is that just generally, if we have a flat interest rate environment, then we wouldn't get that noise as well, I assume.

Jennifer Allen

Correct.

Great info @UK. Thanks for sharing. So, incorporating Fairfax's CFO's interpretation of discounting into @Viking's model would result in EPS projections that look more like this:

 

2023: $155

2024: $148

2025: $153

[Thrifty3000]

Normalized $150 EPS per share is more in line with where I personally model FFH's earnings. However, I've been considering making one more adjustment that I recall one insurance analyst doing that made sense to me.

 

I can't remember which analyst did it, but they would go ahead and bake in an assumption of 1 mega cat - like Hurricane Katrina - happening every 5 years, and spread the expected losses over the 5 year period.

 

So, if we assume a Katrina-sized mega cat will happen at some point in the next 5 years and will shave, say, $50 per share off FFH's earnings in that year, then we can normalize it by reducing expected EPS by $10 annually. So, I'm considering reducing my normalized EPS estimate from $150 to $140. 

[Malmqky]

10 minutes ago, Thrifty3000 said:

Normalized $150 EPS per share is more in line with where I personally model FFH's earnings. However, I've been considering making one more adjustment that I recall one insurance analyst doing that made sense to me.

 

I can't remember which analyst did it, but they would go ahead and bake in an assumption of 1 mega cat - like Hurricane Katrina - happening every 5 years, and spread the expected losses over the 5 year period.

 

So, if we assume a Katrina-sized mega cat will happen at some point in the next 5 years and will shave, say, $50 per share off FFH's earnings in that year, then we can normalize it by reducing expected EPS by $10 annually. So, I'm considering reducing my normalized EPS estimate from $150 to $140. 

I really like this approach as well. Thanks for reminding me of this, I remember reading something along these lines a while back but don’t remember the analyst either or where I read it.

[StubbleJumper]

23 minutes ago, returnonmycapital said:

Perhaps I'm thinking incorrectly, but I think of assets and the capital backing those assets in terms of spread. Assets need to have a positive spread over the capital backing them. Given the situation currently, FFH is showing a materially negative spread on their variable rate preferred capital. Should the situation continue, it would seem rational to exit that situation. I agree that it is best to do so in the open market, given the current discount to par prices but if they come right up to the date of redemption and there is still some variable-rate preferred outstanding on a negative spread, I'm not sure that I'd be furious with management if they redeemed.

 

 

Well, that's true.  If you were going to buy an asset today, over the life of the asset, you would want the expected return on that asset to exceed the expected cost of capital backing it. 

 

At first glance, FFH's balance sheet is replete with assets that return less than the cost of maintaining the preferred shares.  But, there's one major problem with that: almost all of FFH's assets are held by its insurance subsidiaries.  In fact FFH has tens-of-billions of dollars of sovereign debt that yields less than the cost of those prefs.  However, that relatively low-yielding sovereign debt is required for the insurance subsidiaries' reserve requirements.  The regulators will not allow FFH to just sell the treasuries and use the proceeds to retire more costly debt and preferred shares because the treasuries are effectively the guarantee that the company will pay indemnities to the policy holders.  To the extent that the insurance subsidiaries currently have excess capital, FFH could liquidate some treasuries, use the proceeds to issue a dividend to the holding company, and then use that cash to redeem prefs or repay debt.  However, as a general rule, when an insurance company is in the midst of a very profitable hard market and is trying to grow its book of business, you don't shed excess capital because it constrains your ability to grow.  So, for 2024 and maybe 2025, I would not expect to see abnormally large dividends from FFH's insurance subs to the holdco.  There may be some other marketable assets held by the holdco that do not yield ~10% pre-tax, but I can't think of many low-yielding assets that could be sold to redeem the prefs.

 

If you want to buy the prefs, you do it because, beginning in 2025, they'll likely provide a nice tax-advantaged dividend of ~10% on today's market price.  If you are lucky, the hard market will turn in 2025, FFH will shrink its books of business and at that point you might see some larger dividends to the holdco.  But, even at that point, I doubt that redeeming the prefs will rank very highly on FFH's hierarchy of capital uses.

 

 

SJ

[StubbleJumper]

18 minutes ago, Thrifty3000 said:

So, if we assume a Katrina-sized mega cat will happen at some point in the next 5 years and will shave, say, $50 per share off FFH's earnings in that year, then we can normalize it by reducing expected EPS by $10 annually. So, I'm considering reducing my normalized EPS estimate from $150 to $140. 

 

Really, to do that properly would require going back into the ARs and grabbing 10 or 20 years worth of CRs and stripping out the cat losses so that you calculate an average number of CR points lost to cats.  Happily, FFH usually reports both the composite CR and a CR excluding cats.  It's not an enormous task, but then you can use that average CR points of cat loss to help build a normalized earnings estimate.

 

 

SJ

[Tommm50]

4 hours ago, sleepydragon said:

reading Fairfax's annual letters last night. I am new to this stock.. but they are writing insurance everywhere in the world -- like Indonesia etc.. Do they really know what risks they are taking on? It makes me a bit hard to sleep at night. 

 

I agree with StubbleJumper. Having written business internationally myself I can say writing liability business (largely what Fairfax does) outside the U.S. is way more consistently profitable than in the U.S.. Americans are one of the most litiguous

populations on the planet.

 

Also, U.S. is a mature market with fierce competition and modest incremental growth. The economies of other countries around the world have an ability to grow at a much faster pace (although obviously smaller scale). India is the poster child. The opportunity to grow profitably in emerging markets is much more attractive as instead of achieving growth by taking an account from another insurer you have more insureds that are just starting and need insurance.

 

This means Fairfax's geographic spread and presence in significant emerging markets is one of its greatest strengths and a huge strategic advantage. You should sleep well mon ami.

[SafetyinNumbers]

2 hours ago, Thrifty3000 said:

Great info @UK. Thanks for sharing. So, incorporating Fairfax's CFO's interpretation of discounting into @Viking's model would result in EPS projections that look more like this:

 

2023: $155

2024: $148

2025: $153

It’s funny, I read the same post and it made me think I was right. I think to take out the IFRS17 plug, you have to assume no premium growth which isn’t consistent with the rest of the forecast.