Q3 results

[TwoCitiesCapital]

1 hour ago, gfp said:

So end of Q3 the duration was still 2.3 years.  The best part of the extended duration to 3.1 years (current situation) is that it occurred in October!  An excellent time to grab those 3 and 5 year notes.

 

 

 

Excellent execution. I'm gonna sleep much easier knowing the interest is flowing for AT LEAST 3 more years with opportunities for gains and swaps into credit if rates come down in a recession. 

 

10 minutes ago, MMM20 said:

 

Give it two or three days. There's often a lag for some reason. Efficient markets!

 

That was definitely the case in the past, but I don't think has been how it's traded in the recent past. 

 

I used to be able to see the fantastic results and load up on shares that'd pop 1-3 days later. More recently though it's responded pretty quickly to the earnings releases (like today). 

[Crip1]

3 minutes ago, gfp said:

 

Are you asking what the definition of October is?

Kinda 

No, seriously, just illustrating out how the 10-year spiked in October. 

I am in the mortgage business in the US and remarked to colleagues last month that the market look oversold. But, offering an opinion is one thing...executing on that opinion is another and FFH looks to have done just that. Impressive.

 

-Crip

[value_hunter]

17 hours ago, Thrifty3000 said:

 

Yeah, was surprised to see a pullback on premium growth. Maybe they're just being conservative in the third quarter and waiting to back up the truck on higher volume in Q4 and Jan1.

 

Did you notice this footnote?

 

(2)   Excluding Ki Insurance, gross premiums written decreased by 4.0% and 4.6% in the third quarter and first nine months of 2023 and net premiums written decreased by 9.5% and 1.2% in the third quarter and first nine months of 2023. Excluding Ki Insurance, the combined ratios were 92.4% and 93.1% in the third quarter and first nine months of 2023 and 114.8% and 101.2% in the third quarter and first nine months of 2022.

That maybe Brit sold part of its business to Amynta for $400M in May and affect premium written. Q3 brit's premium written dropped 8%. That's also explain Q3 overall net premium written only increase 5% not 6-8% as previous quarters.

Edited November 3, 2023 by value_hunter

[Thrifty3000]

17 hours ago, Thrifty3000 said:

$25 per share of carrying value over fair value is also a nice bonus. No excuse for FFH to trade for less than $900 USD per share. And even that is absurdly cheap - as evidenced by FFH ramping up the buybacks again in Q3.

 

PS. I love FFH and I'm not afraid to say it.

 

 

Just hit $9 hundo intraday. Mr Market is waking up. 

[Saluki]

I picked up a few shares a couple of months ago when it drop in $6xx range.  I should've backed up the truck, but I was building a position in something else (NTDOY) at the time. 

 

In a few weeks when people forget about it again, If it dips below book, I'll sell something and buy some more.  

[gfp]

3 hours ago, UK said:

Anybody has transcript?

 

FFH Q3 cc.pdf

[MMM20]

2 hours ago, Crip1 said:

I am in the mortgage business in the US and remarked to colleagues last month that the market look oversold.

Not to get off topic here but do you mean the mortgage market looks oversold at 8%? Can you explain the mechanics of how mortgage rates spike higher if the market is anticipating rates dropping and mass refinancings? (If that’s even true.) I guess it’s sorta relevant to Fairfax’s big deal with Kennedy Wilson.

 

Edited November 3, 2023 by MMM20

[gfp]

What do they make on the TRS on a day like today?  Like $125 million bucks?

[UK]

35 minutes ago, gfp said:

 

FFH Q3 cc.pdf 79.74 kB · 13 downloads

 

Thanks!

[Xerxes]

Damn

No question about Blackberry’ recent news, highlighting what a big mistake it was not to sell it in 2021. 

[Crip1]

1 hour ago, MMM20 said:

Not to get off topic here but do you mean the mortgage market looks oversold at 8%? Can you explain the mechanics of how mortgage rates spike higher if the market is anticipating rates dropping and mass refinancings? (If that’s even true.) I guess it’s sorta relevant to Fairfax’s big deal with Kennedy Wilson.

 

This is something of which I have knowledge, but would not categorize myself as an expert, analogous to the fact that I know a fair amount about American Football, but am not nearly qualified enough to be an NFL coach.

 

The mechanics of rates spiking on Refi concerns is not something on which I have significant expertise but let me throw a little out there. Mortgage rates are comprised of the value of MBSs and the Servicing Premium. Servicing Premiums are sensitive to refi-risk as holding the servicing rights of a group of 4% loans are far less likely to suffer from refinances than a group of 6% loans. If the market anticipates rates moving higher, the market assigns a higher value to the servicing rights for new loans since the chances of refinances moves lower as rates move higher. Conversely, if the market anticipates rates moving lower, the perceived value of Servicing Rights on a new loan is lower (with higher refi-risk on higher rate loans). So, the two work against each other. But, the primary driver on rates paid by the street is the MBS pricing. 

 

Mortgage Backed Securities (MBS) are most commonly linked to the 10-Year Treasury. The 10 Year had been moving lower for the past 3 months where the news clearly showed that inflation was ebbing. It seemed to me that the market overshot the inflation threat. The MBS market moved even lower-faster than the 10-year which looked to me to be even more of an overshoot. That was the thesis.

 

-Crip 
 

[MMM20]

1 hour ago, Crip1 said:

The 10 Year had been moving lower for the past 3 months where the news clearly showed that inflation was ebbing. It seemed to me that the market overshot the inflation threat.

 

Agreed. 

 

Thanks!

[MMM20]

2 hours ago, Xerxes said:

Damn

No question about Blackberry’ recent news, highlighting what a big mistake it was not to sell it in 2021. 

 

It was just really bad luck that they were locked up at that exact point in time, wasn't it? I'm personally grateful for that b/c it's what made me take a harder look at FFH and I think continues to contribute to keeping the stock cheap even as it now shrunk to what, ~1% of GAV? ~2%? All the major drivers have gone so right for FFH and yet we still hear about BB from people who gave up on Fairfax last decade. Hopefully we'll look back in a few more years and realize that whole thing was a huge blessing in disguise for newcomers, even now.

 

Edited November 3, 2023 by MMM20

[Spekulatius]

On 11/1/2023 at 3:12 PM, Cigarbutt said:

So, i would suggest, as a quick measure, to use your measure, to call it the Spekulatius quick measure, to correct for the harmony between the numerator and denominator and to multiply by 2 and then i think you'd be in the right ballpark.

You are probably correct. What I do is just a quick measure to compare insurance cos quickly for the length of their tail. I think generally speaking, management should have the right answer using proper discounting.

[Tommm50]

I've owned this stock for over 20 years, this may be the largest single day increase in it's history.

 

And it's just getting started...

[steph]

I have been a shareholder for 18 years and have made it a very large position two years ago because the risk/return compared to other opportunities was just unique.  A bit like Berkshire at one point around book value when the overall market was expensive. 

I have always been amazed by Brian Bradstreet and I am surprised he is not better known.  He is a true legend.  I suppose Bill Gross had a good track record in bond investing, but nobody comes even close to Brian’s track record.  And in the end, fixed income is the most important part of the portfolio of any insurance company.  

Even though the stock is up nicely, I still believe Fairfax is one of the best risk/rewards today.  Never have they been in the luxury position of having close to 10% of market cap coming in annually, for at least the next three years, from interest on AAA treasuries.  Imagine what they will be able to do with that….

My reasoning is the following: Book at +/- 900 at the end of this year.  You add 100 every year, for the next three years. End of 2026 book is at 1200.  By then people will finally realize that FFH is worth at least the same multiple as most other insurance companies.  Let’s take 1,25 times book (still reasonable).  Target stock at 1500 in three years.  Return of more or less 20% annually.  

In the meantime we will probably have to go through bad news regarding Blackberry (which will make a lot of noise).  There will certainly be one bad insurance year.  But I am convinced that there will also be some very nice surprises that will more than make up.  So adding 100 a year to book value is very reasonable in my opinion and 20% a year a high probability outcome.

[Cigarbutt]

16 hours ago, Spekulatius said:

You are probably correct. What I do is just a quick measure to compare insurance cos quickly for the length of their tail. I think generally speaking, management should have the right answer using proper discounting.

The quick measure is fine to filter and obtain a rapid comparison.

-----

---)  Back to FFH Q3 results

-----

-Mostly unrelated and irrelevant additions

-If you look at Mercury General (MCY; you've commented on this company before, good consumer deal, good agent but poor stock to own), they don't even try to match assets with liabilities and have relied for decades on positive cash flows from operations to pay developing claims (mostly car claims in California) and their Spekulatius quick ratio is 1.05. They have this nice table in their annual report:

So the quick measure works quite well and is related to the float leverage that long-tail lines entail. The other relevance between MCY and FFH is the temporary noise we're going through related to older years negative reserve development that are mitigated by reserve releases from more recent Covid-related years. It's interesting to watch versus the sustainability/durability of the hard market.

-If you look at the latest Personal Finance thread on worldwide wealth, you see that they report Belgium occupying the top spot and an inverse relevance to FFH numbers is that one needs to dig a little to figure out that Belgium numbers do not compare to other countries as the referenced link (likely) reported median wealth numbers without including private debt. Also related to a convergent relevance to FFH, one has yo dig a little to guess unreported assets. For the comparison of median wealth in different countries, using Germany as an example, it can be established that Germany has a relatively high level of 'public' ownership which, in theory, if spun out to citizens would result in a much better relative standing for median 'private' wealth. Of course, in that category, the champion is Norway with their publicly owned sovereign wealth fund which is not reported in the reference used in the thread. To adjust, you would need to add 250k USD to very citizen and then Norway dethrones Belgium in the top spot (once appropriate balance sheet adjustments are made).

 

Edited November 4, 2023 by Cigarbutt
minor spelling

[MMM20]

7 hours ago, steph said:

I have been a shareholder for 18 years and have made it a very large position two years ago because the risk/return compared to other opportunities was just unique.

 

I think the really compelling thing now is that even with this massive ~3x run, the valuation relative to earnings power and peers hasn't really changed much over the past couple years, if I'm analyzing it correctly. I still think we're trading at high single digits normalized earnings, a ~50%+ discount to almost any reasonable comp.

 

Those of us buying a couple years ago look smart in retrospect with the way things have played out so far. I bought it in large part as a hedge to my generally longer duration portfolio (see? I'm dumb), so I know I was lucky at least. But frankly there's a reasonable argument to be made that the risk/reward is better now looking forward than it was ~2-3 years ago. We've been through an all-time sharp hiking cycle with ideal positioning on the fixed income side, which certainly wasn't a given outcome ~2-3 years ago. We've also now clearly seen that they in fact haven't lost their mojo on the investment side, and now they're in a huge position of strength with their balance sheet and really attractive reinvestment opportunities, not least of which is the potential to take out a quarter to upwards of half of the shares out of cash flows, proper Teledyne-style, over the next few years, if they so choose and if the stock keeps trading at such a discount.

 

I think only a sliver of the market is made up true value investors with the structure and/or temperament to buy at a discount to intrinsic value in an expected value, scenario-weighted, probabilistic sense, agnostic to flows and timing of narrative shifts... at least that's how I'd define it. So now you start to get interest from the value investors who are more comfortable buying something that's inflected recently, with proof that the thesis is "working" and yet still screams cheap. And then you still have the, what, ~80%? ~90%? of capital managed by indexers (h/t @SafetyinNumbers), momentum types, GARP/growth, and day traders / pure FOMOers.

 

So the "setup" might be better now than it was a couple years ago, and we're seeing more interest on the margin. I think that's just getting started, really. So maybe the time to sell your last share when we get 15 fawning questions on a conference call and Prem is back on the cover of Canadian Forbes (is that still a thing?)

 

Anyway, I still like the stock and, after sleeping well enough on it, sticking with the way too big position.

 

Edited November 4, 2023 by MMM20

[Xerxes]

On all the bullish assumption on FFH

 

“It's not what we don't know that gets us in trouble. It's what we know for sure that just ain't so'?“ - Mark Twain 

 

Xerxes is party popping from his new base in Kuala Lumpur 

[MMM20]

22 minutes ago, Xerxes said:

On all the bullish assumption on FFH

 

“It's not what we don't know that gets us in trouble. It's what we know for sure that just ain't so'?“ - Mark Twain 

 

Xerxes is party popping from his new base in Kuala Lumpur 

 

I think the best rebuttal is that the "bullish assumption" is from our odd crowd that represents ~1% of the composition of the market. It's still crickets from the 99%. And the opposite of love is not hate but indifference, right? I just can't see (though I guess that's your point!) how is this close to bullish sentiment just b/c like 12 of us on this niche value nerd forum are bulled up and while it still trades at what seems to me at least like a pretty depressed (or at least nothing close to stretched) valuation and with 2 questions on the call.

 

As far as I can tell, we started off ~2-3 years ago at "child slave labor strip mine" sentiment and are like ~25% of the way to "generally recognized as the next BRK" levels. That's my proprietary scientific scale.

 

 

Edited November 4, 2023 by MMM20

[Parsad]

14 minutes ago, MMM20 said:

 

I think the best rebuttal is that the "bullish assumption" is from our odd crowd that maybe represents at most like 1% of the composition of the market. It's still crickets from the 99%. And the opposite of love is really indifference, right? Famous last words, but I don't see how is this is anything even close to broad bullish sentiment about a stock just b/c like 12 of us on this niche value nerd forum are bulled up and while stock still trades at what seems to me at least like a pretty depressed (or at least nothing close to stretched) valuation.

 

 

 

Once Brett Horn actually goes bullish and changes his target to $1,500, then worry!  Until then, enjoy the ride...probably the best run in terms of growth in book value FFH has been on since the 1990's!  Cheers!

[Viking]

10 hours ago, steph said:

I have always been amazed by Brian Bradstreet and I am surprised he is not better known.  He is a true legend.  I suppose Bill Gross had a good track record in bond investing, but nobody comes even close to Brian’s track record.  And in the end, fixed income is the most important part of the portfolio of any insurance company.  

@steph , I agree. Over the past 2 years, have we just witnessed the one of the greatest investments in the recent history of the P/C insurance industry? When he retires (hopefully not any time soon), my guess is Brian Bradstreet will be a unanimous selection for entry into the fixed income Hall of Fame for P/C insurers. Yes, that sounds like hyperbole. But outside of Berkshire Hathaway, can anyone provide me with a better example? 
1.) aggressive move to 1.2 years average duration late 2021. Selling all corporates (locking in realized gains) and moving into treasuries. This protected Fairfax’s balance sheet.

2.) aggressive move to 3.1 years average duration in Oct 2023 with the long end of the curve around 5%. This locks in record/high interest income for the next 3 years.

The team at Fairfax just successfully navigated Fairfax (and Fairfax shareholders) through the greatest fixed income bear market in history. The bond market was in a bubble of epic proportions - and it popped in late 2021 and 2022. It will take years for the carnage to fully play out (it is still mostly hidden on balance sheets).

 

How many billions did this freaking crazy set of decisions make Fairfax shareholders over the past 2 years? Does anyone have an estimate of what the financial benefit to Fairfax shareholders has actually been?
- The avoidance of losses?

- The ability to quickly pivot into higher yielding fixed income instruments?

- And now the extension of duration locking in higher yields (likely in the 5% range)?

 

This string of decisions was done with a portfolio close to $40 billion in size. WTF? 
 

And the table is now set for Fairfax to earn in the range of $2 billion in interest and dividend income in each of the next 4 years. Add underwriting profit and share of profit of associates and you are over $4 billion per year. My guess is some people on this board do not yet grasp the significance of what Prem opened the Q3 conference call with - so is it surprising Mr Market doesn’t get it yet?
 

Q3 Conference Call - Prem: “As I've said for the last number of quarters, the most important point I can make for you is to repeat what I have said in the past. For the first time in our 37-year history, almost 38 years now, I can say to you we expect, of course no guarantees, our operating income to be more than $3 billion annually for the next three years.” (Edit: this number is now comically low…).
 

“Operating income consisting of $1.5 billion-plus from interest and dividend income we earned $1.4 billion year-to-date, $1 billion from underwriting profit, we made $943 million year-to-date, and $500 million from associates and management companies versus $1 billion year-to-date. This works out to be over $100 per share after interest expenses overhead and taxes.” (Edit: Fairfax has exceeded their annual guidance in 9 months…)

 

“We continue to exceed our expectations for the year with the year-to-date operating income already at $3.1 billion, excluding the effects of discounting and risk margin. Fluctuations in stock and bond prices will be on top of that. And this only really matters, as I've said many times, over the long-term.”
 

(Edit: this is the really important part) “Recently, in October, during spike in treasury yields, we have extended our duration to 3.1 years with an average maturity of approximately 4 years, and yield of 4.9%.”

(Edit: and the table is set for the next possible move) “In the next four years, we are likely to have a recession in the United States, resulting in corporate spreads widening, allowing us to extend our maturities further.”

 

—————

 

Fairfax detractors say “yes, earnings are great in 2023 but they are not sustainable.” Well, we have just learned earnings ARE sustainable. 
 

$150/share is the new baseline for earnings. This number should grow nicely over time (as capital allocation and compounding work their magic).
 

What is an appropriate PE? 8X is low. That would be a share price of US$1,200. 

 

What is an appropriate P/BV? 1.3 is low (given a +20% ROE in 2023 and high teems ROE likely continuing for the next few years). That would be a share price of about $1,200 (assuming BV comes in around $920 at year end).

 

So US$1,200/share looks like a cheapish reasonable valuation for today. Add in E$160/share in earnings in 2024 and that would bump the share price to $1,360 as a reasonable target looking out 12 months. Shares closed Friday at $897. That suggests significant return potential over the next 12 months. Despite the stellar run up over the past 3 years, Fairfax's shares still look significantly undervalued to me. The gift that keeps on giving...

Edited November 4, 2023 by Viking

[SafetyinNumbers]

2 hours ago, Viking said:

@steph , I agree. Over the past 2 years, have we just witnessed the greatest investment in the history of P/C insurance? Is Bradstreet and the fixed income team at Fairfax the GOAT? Yes, that sounds like hyperbole. Outside of Berkshire Hathaway, can anyone provide me with a better example? 
1.) aggressive move to 1.2 years average duration late 2021. Selling all corporates (locking in realized gains) and moving into treasuries. 

2.) aggressive move to 3.1 years average duration in Oct 2023 with the long end of the curve around 5%.

The team at Fairfax just successfully navigated Fairfax (and Fairfax shareholders) through the greatest fixed income bear market in history. The bond market was in a bubble of epic proportions - and it popped in late 2021 and 2022. It will take years for the carnage to fully play out (it is still mostly hidden on balance sheets).

 

How many billions did this freaking crazy set of decisions make Fairfax shareholders over the past 2 years? Does anyone have an estimate of what the financial benefit to Fairfax shareholders has actually been?
- The avoidance of losses?

- The ability to quickly pivot into higher yielding fixed income instruments?

- And now the extension of duration locking in higher yields (likely in the 5% range)?

 

This string of decisions was done with a portfolio close to $40 billion in size. WTF? 
 

And the table is now set for Fairfax to earn in the range of $2 billion in interest and dividend income in each of the next 4 years. Add underwriting profit and share of profit of associates and you are over $4 billion per year. My guess is some people on this board do not yet grasp the significance of what Prem opened the Q3 conference call with - so is it surprising Mr Market doesn’t get it yet?
 

Q3 Conference Call - Prem: “As I've said for the last number of quarters, the most important point I can make for you is to repeat what I have said in the past. For the first time in our 37-year history, almost 38 years now, I can say to you we expect, of course no guarantees, our operating income to be more than $3 billion annually for the next three years.” (Edit: this number is now comically low…).
 

“Operating income consisting of $1.5 billion-plus from interest and dividend income we earned $1.4 billion year-to-date, $1 billion from underwriting profit, we made $943 million year-to-date, and $500 million from associates and management companies versus $1 billion year-to-date. This works out to be over $100 per share after interest expenses overhead and taxes.” (Edit: Fairfax has exceeded their annual guidance in 9 months…)

 

“We continue to exceed our expectations for the year with the year-to-date operating income already at $3.1 billion, excluding the effects of discounting and risk margin. Fluctuations in stock and bond prices will be on top of that. And this only really matters, as I've said many times, over the long-term.”
 

(Edit: this is the really important part) “Recently, in October, during spike in treasury yields, we have extended our duration to 3.1 years with an average maturity of approximately 4 years, and yield of 4.9%.”

(Edit: and the table is set for the next possible move) “In the next four years, we are likely to have a recession in the United States, resulting in corporate spreads widening, allowing us to extend our maturities further.”

 

—————

 

Fairfax detractors say “yes, earnings are great in 2023 but they are not sustainable.” Well, we have just learned earnings ARE sustainable. 
 

$150/share is the new baseline for earnings. This number should grow nicely over time (as capital allocation and compounding work their magic).
 

What is an appropriate PE? 8X is low. That would be a share price of US$1,200. 

 

What is an appropriate P/BV? 1.3 is low (given a +20% ROE in 2023 and high teems ROE likely continuing for the next few years). That would be a share price of about $1,200 (assuming BV comes in around $920 at year end).

 

So US$1,200/share looks like a cheapish reasonable valuation for today. Add in E$160/share in earnings in 2024 and that would bump the share price to $1,360 as a reasonable target looking out 12 months. Shares closed Friday at $897. That suggests significant return potential over the next 12 months. Despite the stellar run up over the past 3 years, Fairfax's shares still look significantly undervalued to me. The gift that keeps on giving...

100% agree.

 

The slowing of premium growth in Q3 and very high investment income going forward increases the possibility of much higher surplus capital at the insurance companies.

 

I’m not an insurance expert so I’m wondering what’s the best way to assess what Fairfax’s surplus capital position is now, what it might get to and where it will be used?

 

The analysts are currently assuming a declining ROE as capital builds presumably because they assume low return opportunities for that capital. They already have very low assumptions for associates income and capital gains on the equity portfolio so there are multiple opportunities for upside surprises.

 

 

 

 

[glider3834]

13 hours ago, SafetyinNumbers said:

Is Bradstreet and the fixed income team at Fairfax the GOAT?

I am not sure if I have said this before so apologies if I am repeating myself, but I met Brian Bradstreet at the FFH dinner in the year after Fairfax had the big CDS win, he really came across as very down to earth - maybe not what you would expect from someone who had helped Fairfax make $2B or so on their CDS bet. I asked how he knew about the issues at AIG & he said it was there if you read the footnotes. My takeaway from this brief conversation was here is a guy with who doesn't have a big ego & who really does the work & that honestly impressed me.

 

 

Edited November 5, 2023 by glider3834

[Cigarbutt]

16 hours ago, SafetyinNumbers said:

...so I’m wondering what’s the best way to assess what Fairfax’s surplus capital position is now, what it might get to and where it will be used?

For an idea of the surplus position at end of 2022 (page 93 annual report):