Q1 2023 Conference Call

[nwoodman]

Seeking Alpha seems to have dropped the ball on providing a transcript for the Q1 CC.  If anyone has a copy of the transcript could you repost here or DM me a copy?  Thanks in advance

[gfp]

attached

FFH Q1 23 CC.pdf

[nwoodman]

Thanks for posting, and also those that DM'ed me. Hard to get the tone, but I thought this CC was a standout.   A couple of quotes that struck me.  

 

On earnings outlook

 

V.Watsa

"For the first time at our 37-year history, I can say to you, we expect, of course, no guarantees, our operating income to be more than $3 billion annually for the next 3 years. Operating income consists of $1.5 billion from interest and dividend income, $1 billion plus from underwriting profit and $0.5 billion from noninsurance companies. This works out to about $100 per share after interest expenses, overhead and taxes. Our first quarter is running at these levels."

 

On the mechanics of IFRS 17

 

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.

 

On passing their biggest test IMHO and how and importantly why they are positioned now

 

Peter Clarke

Tom, 1 point that you should know is that we're generally saying we benefited to the tune of $2.4 billion net for the year 2022. We had a bond loss in '22 of about $1 billion. If we were matched (fixed typo), we'd have a $2.4 billion loss, and you'd have had a discounting of $2.4 billion, and we wouldn't have had any benefit. The fact that we weren't matched, the fact that we had -- we didn't reach for yield and it was the reason why we benefited to the tune of $2.4 billion. That's a significant benefit. And I just wanted to put that in perspective for you.

 

Tom MacKinnon

Are you more matched now, Prem, with 80% in government treasuries because...

 

V. Watsa

Yes, still not, Tom, because we are 2.5 years as, I think, Peter, our liabilities at least 4 years, right? 4 plus. And what we're thinking, Tom, is that we've got government securities, [indiscernible] have locked in close to 4% plus/minus for our bond portfolio in treasuries, like I said, 80% of the short-term corporates will mature. But when you have a recession, we don't know that there'll be a recession. But in the next 3 years, if you have a recession, if the spreads, which happened widened and I experience over a long period of time as when you have a recession, the spreads widen. And when the spreads widen, we think we'll go into very high-quality corporates, as I've said at the AGM, 3, 4, 5 years in a term as opposed to duration, and then lock in those rates, very high quality rates. And hopefully, we'll make some money perhaps on treasuries, but in respective, we locked those rates. And that could be pretty significant when the spread widens, but that's just speculating in terms of what's potentially possible.

 

On leverage

 

Peter Clarke

Yes. No, I think the way we look at our debt to total cap has been dropping nicely in the last number of years, and we're in the low-20s now. And as our equity base expands, that ratio will come down even further, that would give us excess capacity in an environment where we were looking to raise that. But we're comfortable where we are, and I think you'll see that ratio decrease as the equity base gets bigger. Our equity base, we are focused on our equity base going bigger. And I mentioned this operating income is $100 a share. That's like, you add 3 years to that. That's pretty significant, right? And they're focused on that becoming bigger.

 

 

Another really helpful conference call.  Talk about firiing on all cylinders 

[dartmonkey]

On earnings outlook

 

V.Watsa

"For the first time at our 37-year history, I can say to you, we expect, of course, no guarantees, our operating income to be more than $3 billion annually for the next 3 years.

 

Pretty amazing, for a company with a market cap of $17b (USD); in other words, the company is expected to earn half its market cap in the next 3 years, with no reason to think it will have less earnings thereafter. I increased my already indecent stake to almost 50%; I know of no other company with such a likely return of 100% or so in the next few years.

 

But what is this V. Watsa business? Does anyone know what the V stands for?

 

Fairfax was founded in 1985 by the present Chairman and Chief Executive Officer, V. Prem Watsa

[gfp]

17 minutes ago, dartmonkey said:

But what is this V. Watsa business? Does anyone know what the V stands for?

Prem's first name is Vivian

Edited May 16, 2023 by gfp

[Santayana]

Vivan