Corner of Berkshire & Fairfax Message Board

General Category => Fairfax Financial => Topic started by: zippy1 on February 15, 2018, 02:47:03 PM

Title: 2017 q4 result out!
Post by: zippy1 on February 15, 2018, 02:47:03 PM
Book value now $449 up 24.7% in 2017.
http://www.fairfax.ca/news/press-releases/press-release-details/2018/Financial-Results-for-the-Year-Ended-December-31-2017/default.aspx
Title: Re: 2017 q4 result out!
Post by: Viking on February 15, 2018, 02:51:39 PM
From the press release: “At December 31, 2017, common shareholders' equity was $12,475.6 million, or $449.55 per basic share, compared to $8,484.6 million, or $367.40 per basic share, at December 31, 2016. Common shareholders’ equity at December 31, 2017 does not include the unrecorded pre-tax $1,233.1 million excess of fair value over the carrying value of investments in associates and certain consolidated non-insurance subsidiaries.”

Allied World Q4 combined ratio = 132; looks like they bore the brunt of $185 million in catastrophe losses due to California wildfires. I hope this business is getting some nice price increases and turns things around in 2018.
Title: Re: 2017 q4 result out!
Post by: StubbleJumper on February 15, 2018, 03:40:35 PM
Well, the numbers are nice, but it does bring to mind all of the cautions about lumpiness of results.  A few random observations:

1) Net written spiked nicely in Q4 and was up overall in 2017.  Given FFH's capital levels and underwriting capacity, this is a good sign of things to come.  If you are brave enough to pencil in a combined ratio of 95 and $500m in interest and divvies, it provides the basis of a decent and predictable operating income.

2) Nice to see reserve releases, especially for ORH.  WTF is going with Allied's adverse development, and can FFH fix it?

3) The bond and equities ports are running pretty lean, which is an excellent position in the context of rising rates.  Shitloads of cash, t-bills and short term bonds is a nice place to be.  Can we be brave enough to pencil in 2% for the cash equivalents for 2018, or is that dreaming in technicolour?

4) Holdco cash is high, which is no surpise after some of the asset sales.  But what's the deal with expanding the revolver to $2b?  So the holdco now has ~$4.0B-4.5B of immediate available cash, when taking into account the expanded LOC.  Why?  Presumably there's a standby fee for the revolver, so doubling it is a bit strange when FFH is already swimming in cash.  I understand that you want to acquire your credit when you don't actually need it, but this one seems strange.

5) Unrealised gains on equities were considerable.  How much of this has been given back in the past week or 10 days?  Some of the large legacy equity positions have finally moved the right direction, but has the market turned before FFH had the opportunity to exit?


Overall, I like the current position with very little of the port in equities and 5+ year bonds.  If the cash actually starts to yield something in 2018 and 2019 (as I questioned above, dare we dream 2%) and net written expands with the continued prospect of writing a CR of 95, there's a solid prospect of sizeable operating income.

And today it traded pretty much bang-on with the adjusted book.  Hard to believe.


SJ
Title: Re: 2017 q4 result out!
Post by: dutchman on February 15, 2018, 03:59:32 PM
Thanks for that review Stubble. Sounds like ull be buying more.
Title: Re: 2017 q4 result out!
Post by: StubbleJumper on February 15, 2018, 04:11:20 PM
Thanks for that review Stubble. Sounds like ull be buying more.


It's doubtful that I will buy more.  I'm at 22% FFH, which is already far too high.  The shares look cheap, but Prem has done so many wacky things over the past 5 years that it's a tough thing to take the plunge to go to 30% or 35% (I've been there in the past, but the recent wackiness is a real hurdle for me).


SJ
Title: Re: 2017 q4 result out!
Post by: Txvestor on February 15, 2018, 04:36:40 PM
I agree, and I hope he has come to terms with his wackiness!
I also worry a little about the Underwritig at AWH and hope there are no roaches in that motel we have taken over.
Title: Re: 2017 q4 result out!
Post by: Viking on February 15, 2018, 04:53:28 PM
The key moving forward, as it usually is with FFH, is how they invest. What is the plan with the $17 billion in cash and short term investments? Given the results posted over the past 5 years I think many people are in wait and see mode.

As bond yields move higher the decision in Q4 2016 and Q1 2017 to sell long dated bonds and move to cash has certainly been a good one. But it may take 12-24 months before FFH starts making meaningful purchases of long dated bonds again. Patience will be important.
Title: Re: 2017 q4 result out!
Post by: Valuehalla on February 15, 2018, 05:02:24 PM
With the new investment in CTL, Prem has done a great decision.
But I hope he will increase this very small position after the positive Q4 figures which came out yesterday.
Title: Re: 2017 q4 result out!
Post by: Dazel on February 15, 2018, 05:26:33 PM
You guys had me at hello!!

LOL
Title: Re: 2017 q4 result out!
Post by: Dazel on February 15, 2018, 05:58:55 PM

Look at the 2018 thread
Title: Re: 2017 q4 result out!
Post by: no_free_lunch on February 15, 2018, 06:17:45 PM
Sure BVPS is up 24% or whatever this year but it dipped down last year.   Here is the BVPS values for past few years:

2017: $449
2016: $367
2015: $403
2014: $394

Very sluggish results against 2015 or 2014 numbers.
Title: Re: 2017 q4 result out!
Post by: Dazel on February 16, 2018, 06:17:07 AM


There is $1.2b not recognized in book value  in the associates....and yes the hedging losses 2014-2016) is reason why  we trade so cheaply....it has been beaten to death here!
Title: Re: 2017 q4 result out!
Post by: StubbleJumper on February 16, 2018, 06:49:29 AM
And, the stock price is essentially flat at this morning's bell.  Interesting.


SJ
Title: Re: 2017 q4 result out!
Post by: Crip1 on February 16, 2018, 10:40:44 AM
And, the stock price is essentially flat at this morning's bell.  Interesting.


SJ


We've seen multiple instances of earnings coming out for FFH where price movement is relatively stable for 1-3 days only to see a significant move up (3-5%). Since I've got a pretty hefty position in Fairfax and am not one to trade on short-term movements, I'm not buying in to this, but history does show this to have occurred multiple times in the past.


-Crip
Title: Re: 2017 q4 result out!
Post by: cwericb on February 16, 2018, 10:48:31 AM
"We've seen multiple instances of earnings coming out for FFH where price movement is relatively stable for 1-3 days only to see a significant move up (3-5%)"

That is absolutely right. I have noticed the same thing several times over the years. Any guesses as to why? The only thing I can think of is that FFH is just so far under the radar its like "Oh gee look at that, Fairfax posted some good results perhaps I should pick some up."

At times for me, it has been like having inside information about the results before they are posted. I'd be picking up more but I am already over concentrated in Fairfax.

FIH.U is up 4% though.
Title: Re: 2017 q4 result out!
Post by: Cardboard on February 16, 2018, 11:35:41 AM
2017 pretax loss before significant booking of capital gains and truly a one-time gain of just over $1 billion on the sale of a subsidiary was: -$462.9 million.

And out of the eye popping 20%+ growth in BVPS, a large portion is due to issuing 20% more shares than last year above book to acquire insurance companies combined with the one-time gain.

As I have mentioned countless times, there is no ROE generated if you exclude capital gains. So to trade well above book and generate the respect that you guys seek they have 2 choices:

1- Grow really fast like in the late 80's and 90's by acquiring company after company with an overvalued currency.
2- Generate a portion of the return via sound, repeatable earnings. That means low cost, less interest paid, profitable underwriting and more deployed into sound investments with the blessings of regulators.

Cardboard
Title: Re: 2017 q4 result out!
Post by: vinod1 on February 16, 2018, 11:53:56 AM
Our results in 2017 were the best in our thirty-two year history, in spite of some of the largest catastrophe losses in
history as a result of Hurricanes Harvey, Irma and Maria and the California wildfires,” said Prem Watsa, Chairman
and Chief Executive Officer. “We achieved record earnings of over $1.7 billion, resulting in a 22.4% increase in
our book value per share to $449.55."

I cannot imagine Buffett or Mark Leonard would ever say such a thing with the results achieved.

Vinod
Title: Re: 2017 q4 result out!
Post by: StubbleJumper on February 16, 2018, 11:55:37 AM
2017 pretax loss before significant booking of capital gains and truly a one-time gain of just over $1 billion on the sale of a subsidiary was: -$462.9 million.

And out of the eye popping 20%+ growth in BVPS, a large portion is due to issuing 20% more shares than last year above book to acquire insurance companies combined with the one-time gain.

As I have mentioned countless times, there is no ROE generated if you exclude capital gains. So to trade well above book and generate the respect that you guys seek they have 2 choices:

1- Grow really fast like in the late 80's and 90's by acquiring company after company with an overvalued currency.
2- Generate a portion of the return via sound, repeatable earnings. That means low cost, less interest paid, profitable underwriting and more deployed into sound investments with the blessings of regulators.

Cardboard

I heartily disagree.

1) Underwriting - if you run-rate Q4 you get $11B net written.  Tack on price growth from a firming market, you are at $12B net written.  Given past performance, I'd say they can write the $12B at a 95 CR, which gives $600m UW profit.

2) Interest and divvies - FFH has $20B of cash/T-bills/etc.  Interest rates have risen.  If they can average 2% during 2018, that's $400m.  They have $9B in bonds, which might average 2.5%, so that's another $225m.  And then $5B in common stocks might average 1%, so that's another $50m.  Call it ~$600m for the sake of conservatism (knowing that it's likely more like $700m)?

So, let's rack it up:


UW profit: $600
Interest and divvies: $600
Run-off: -$250
Non-insurance profit: $200
Corporate O/H & interest expense: -$300
Net gains: 0

Pre-tax income: $850m

So, in my book, there's $20+/share of after-tax earnings from operations.  The realised gains are gravy.


SJ
Title: Re: 2017 q4 result out!
Post by: Cardboard on February 16, 2018, 01:12:01 PM
Check your math at the end of next year and I can almost guarantee you that you will be wrong.

Cardboard
Title: Re: 2017 q4 result out!
Post by: StubbleJumper on February 16, 2018, 01:31:50 PM
Check your math at the end of next year and I can almost guarantee you that you will be wrong.

Cardboard


The numbers are 100% wrong, there's no doubt.  The question is if you eliminate the realised gains, will there be a material EPS?  And I will go out on a limb and say yes, in the absence of some unusual series of cats, there will be a material EPS from underwriting, interest/divvies and non insurance.

But, as a long time shareholder, I understand your cynicism. 


SJ
Title: Re: 2017 q4 result out!
Post by: MarioP on February 16, 2018, 01:42:01 PM
Check your math at the end of next year and I can almost guarantee you that you will be wrong.

Cardboard


The numbers are 100% wrong, there's no doubt.  The question is if you eliminate the realised gains, will there be a material EPS?  And I will go out on a limb and say yes, in the absence of some unusual series of cats, there will be a material EPS from underwriting, interest/divvies and non insurance.

But, as a long time shareholder, I understand your cynicism. 


SJ

To your estimate you need to add a new  stream of revenu from FIH : in january they will pay FFH   114M in performance fee. We can hope for something from Fairfax Africa too in the  futur
Title: Re: 2017 q4 result out!
Post by: mcliu on February 16, 2018, 01:45:47 PM
Check your math at the end of next year and I can almost guarantee you that you will be wrong.

Cardboard

Are you suggesting that underwriting (ex. CAT) will be a lot weaker next year? or they'll make more investment losses?
Title: Re: 2017 q4 result out!
Post by: StubbleJumper on February 16, 2018, 01:51:18 PM
Check your math at the end of next year and I can almost guarantee you that you will be wrong.

Cardboard


The numbers are 100% wrong, there's no doubt.  The question is if you eliminate the realised gains, will there be a material EPS?  And I will go out on a limb and say yes, in the absence of some unusual series of cats, there will be a material EPS from underwriting, interest/divvies and non insurance.

But, as a long time shareholder, I understand your cynicism. 


SJ

To your estimate you need to add a new  stream of revenu from FIH : in january they will pay FFH   114M in performance fee. We can hope for something from Fairfax Africa too in the  futur


Yes, I believe that in the non-GAAP statements, FFH normally lumps investment fees in with the corporate overhead.  This time, it looks like corporate overhead, interest and investment fees all lumped together.  So interest goes up with the new debt taken on during 2018, but that's partially offset by better investment fees.  But, I'd say that particular line of my crappy pro-forma statement is one of the least accurate!


SJ
Title: Re: 2017 q4 result out!
Post by: StubbleJumper on February 16, 2018, 01:59:48 PM
Check your math at the end of next year and I can almost guarantee you that you will be wrong.

Cardboard

Are you suggesting that underwriting (ex. CAT) will be a lot weaker next year? or they'll make more investment losses?


I'm guessing that it's general cynicism and ennui with FFH. 

U/W profit from 2014 to 2017 was $705m, $552m, $576m and -$642m.  I don't feel badly at all about pencilling in 2018 Net Written Premiums of $12B at a CR of 95, yielding $600m of U/W profit when they've bounced around that level with lower premiums and lower CR.  If anything, I could be chastised for not pencilling in a CR of 90 or 92 to reflect that insurance prices have trended up in response to last year's ridiculous industry level cat losses.

With most of the port in cash, t-bills and bonds, there shouldn't be major investment income surprises.  I guess if interest rates rise meaningfully, the $9B of bonds could get written down to $8.7 or $8.5B, but that's not such a problem.


SJ
Title: Re: 2017 q4 result out!
Post by: gary17 on February 16, 2018, 02:09:39 PM
Can they compound book value at 10% for five years? if they can that’s good enough for me lol
Title: Re: 2017 q4 result out!
Post by: Jurgis on February 16, 2018, 02:39:52 PM
Can they compound book value at 10% for five years? if they can that’s good enough for me lol

Their past 5 year compounding was very low. But 2017 bumped it up to ~9% (ex divs, so perhaps 10% with divs) by a sub sale and the rest of 2017 results.
So I guess it's your call to decide whether to treat that as a legit contribution to 5 year book value compounding or not.
And to decide if they can repeat that going forward 5 years.  8)
Title: Re: 2017 q4 result out!
Post by: Viking on February 16, 2018, 03:00:35 PM
Just finished listening to the conference call. Here are some thoughts:

Prem’s summary at the end of the conference call:
- currently have a run rate of $15 billion in net written premiums
- have underwriting discipline
- portfolio of $40 billion; will build investment income
- HWIC playing offense
- all grounded on fair and friendly culture built over 32 years
- we expect we will generate 15% return for our shareholders for 2018. This means around $2 billion in net income or $70/share

The RBC analysts during the Q&A session asked if Prem was issuing guidance with his statements above. Prem said of course not; FFH does not provide guidance. The RBC guy said that someone listing to the call who was not familiar with Prem might take his comments for guidance.

I am surprised that Prem would be so bold to make such a specific comment if he did not have a concrete plan to hit it. Otherwise it just looks like he is trying to talk the stock price up.
Title: Re: 2017 q4 result out!
Post by: Cardboard on February 16, 2018, 03:08:39 PM
"I'm guessing that it's general cynicism and ennui with FFH."

Actually it is not. Already we are seeing cracks in under-reserving from their recent acquisitions. They also have a history of their own under-reserving following large cats. I am suspecting that we will see some more in 2018.

There is also the expectation that 2017 was an odd year for catastrophes. I can't disagree entirely with that however, I believe that having almost no hurricane landing in populated area since 2005 is also very odd. And when was the last large earthquake in NA?

Then we can review the last 5 years with some containing near zero catastrophe and we will find out that what I mentioned or pre-tax loss or running essentially breakeven without the help of capital gains was the case.

So maybe that everything will go right and that they will make $850 million as SJ pointed out but, I have serious doubts. And once they start reinvesting some of the cash, there will likely be an near immediate drop in investment value as we all seem to experience whenever we deploy capital and you will feel less confident about their investing abilities.

My recommendation continues to be: drop leverage, find better, more stable investments/businesses, stop the market timing game. Basically copy Buffett. The old guy has a much, much bigger capital base and has outperformed Fairfax over the last 10 years. That should tell you something.

Cardboard
Title: Re: 2017 q4 result out!
Post by: Viking on February 16, 2018, 03:55:24 PM
Here are my remaining notes from the conference call. Please correct any errors as you see fit :-)

US tax reform:
- took a $326 million charge in Q4 (reduced value of DTA)
- it sounds like US tax reform will be a solid benefit for FFH.
- During the conference call FFH said 60% of their business is in the US but did not provide an estimate for the new expected tax rate.
- RBC today lowered their effective tax rate estimate for FFH for 2018 from 26% to 19%; this is a significant reduction.

Interest rates:
- As short term interest rates move up FFH should see nice growth in interest income given they have about half of the investment portfolio in cash and short term investments.
- Prem said FFH has not reached for yield with its investment portfolio while other insurers have
- feels higher inflation is likely; interest rates could increase significantly and credit spreads could widen

Investment income
- Prem talked up recent C-span warrant deal: builds investment income by $15 million per year. With possible capital gains kicker
- similar to Corus, AGP? and Altius
- like these deals

Insurance rate renewals
- generally, rates are no longer going down; rates are flat to increasing (varies)
- casualty 0-5% increases;
- property 10% increases; loss affected areas seeing increases of 20-25%

$2.4 billion cash at hold co
- NOT looking for acquisitions
- looking to buy back stock
- Prem said during the Q&A it is highly unlikely dividend will increase
- Prem also said they would like to take Eurolife, Brit and Allied 100% private (no timeline given); this did not sound imminent to me but why mention it if it was not on the table for 2018?

Allied World:
- $50 million Q4 reserve increase was related to one specific claim (casualty)
- FFH continues to think they are very well reserved
- cat losses were higher than FFH expected; cat losses in the future will be less (FFH does this different than Alied World and Allied World will change to FFH practice)

FFH India
- FFH performance fee is paid in shares (as per agreement); ownership has increased from 30 to 33%.
- if FFH India trades at 2X book value, FFH can take performance fee in cash
- Bangalore airport designed for 20 million passengers; currently serves 25 million; under expansion to serve 65 million over next 3-4 years
- FFH India building lots of intrinsic value for shareholders

Gravilia & Eurobond Investments
- as Greece economy moves up continues to improve their investments should do very well
- Prem mentioned Ireland as a comparable... when the Irish economy turned for the better their investments there jumped in value significantly

Tail macro risks (does not expect any of these to play out)
- risks: China, world trade disruption, recession
- deflation hedge at $40 million on books; will keep position and hold as insurance for worst case scenario

Refinancing their high interest debt (due over next couple of years) at much lower rates available today. Looks to be a very smart thing to do if you are expecting interest rates to move higher. Hits earnings in the short term but positions the company very well for the long term (if I understand the mechanics properly)
- At the end of December the company completed an early redemption of its remaining C$388.4 million 7.5% unsecured notes due August 19, 2019 for cash consideration of C$430.6 million recognizing a loss of $26 million which is included in “other expenses.”
- On December 4, the company issued C$650 million principal amount of 4.25% unsecured senior notes due December 2027.
Title: Re: 2017 q4 result out!
Post by: ourkid8 on February 16, 2018, 05:06:42 PM
How quickly ppl forget that we are retaining a 25% quota share in first capital!!! FFH sold the  business at over 3x book which allows us to repurchase our stock at book value while that business supercharged their growth! Sounds like an absolute win which will benefit shareholders tremendously.

But 2017 bumped it up to ~9% (ex divs, so perhaps 10% with divs) by a sub sale and the rest of 2017 results.
Title: Re: 2017 q4 result out!
Post by: Dazel on February 17, 2018, 04:03:25 AM


Anyone that is following the financial stocks in the U.S can see that everyone is sandbagging their 2017 earnings. The reason is that anything you write off for the year is taxed at 35% as opposed to less than 20% for most in 2018. As a whole the financials results look terrible...but forward earnings will be tremendous at lower tax rates. Why would Fairfax not take higher reserves in 2017 in their U.S business? I would be dissapointed if they didn't as their were already taking big hits on the disasters! A good business would take the opportunity to over réserve at the higher tax rates and show underwriting profit at the lower tax rates. It's common sense....and they still had a record year.
Title: Re: 2017 q4 result out!
Post by: Cigarbutt on February 17, 2018, 04:52:49 AM
This post is about the underwriting side of the business.
Specifically trying to see the significance of results reported for the Allied World sub (Brit also).

When you see larger than expected losses in the catastrophe area, it can arise simply because of the unexpected nature of events. However it may reveal a problem going along a spectrum from simply exposure, to temporary inadequate pricing to a more widespread poor underwriting/reserving culture.

Actions to correct the problem should be in correlation to the severity of the problem.

My understanding, from numbers reported now and before, and from specific comments made on the conference call, for Allied World (and Brit), is that the problem is likely one of exposure in the property market with catastrophe exposure. Fairfax historically has worked in a decentralized fashion for the insurance and reinsurance subs but, over the years, they have built some kind of oversight (Andy Barnard) with a focus on the underwriting/reserving culture. Once again, OdysseyRe had a very strong year in 2017 despite a very unusual year for the reinsurance industry as a whole. My take is that the exposure problem can be dealt with and I don't think that Allied World (and Brit) were bad acquisitions. It means though that the relatively favorable combined ratio profile that Allied World (and Brit) reported before the recent acquisition did not adequately reflect their "true" normalized combined ratio during an unusually quiet period for the catastrophe market. So, the implication is Fairfax may have paid too much for the acquisition. In retrospect, it would have been better to wait before making the acquisition :). But: In theory, there is no difference between theory and practice but in practice there is (Yogi Berra?). My opinion is that Fairfax has been able to build an unusually strong assembly of global players in the insurance and reinsurance segments poised to grow in the right environment and I think that the relatively unexpected numbers shown by the more recent acquisitions are likely to disappear over time. Results in the catastrophe space are lumpy and fit well with Fairfax philosophy in general. You just have to make sure that you can survive and it is best to use the cycle to your advantage.

Underwriting problems can be more profound (Fairfax has had its share of exposure to this phenomenon a while ago) and here's a link discussing new developments at a company I have followed for a long time. 2017 was unusual in terms of frequency and severity of catastrophes and this has caused the tide to recede to some degree and has helped in defining the severity of the underlying issues.
 https://www.insurancejournal.com/news/international/2018/02/16/480985.htm

Dazel, with all due respect, I submit that a "good business" would maintain a healthy reserving discipline whatever labile tax changes that may occur. I understand that firms may use timing but cooking the books, in my own evaluation, tends to cause a very significant dent in the intrinsic value calculation.
Title: Re: 2017 q4 result out!
Post by: ValueMaven on February 17, 2018, 06:43:23 AM
Cigarbutt - what do you think of AHL here?  Stock hasnt moved in nearly 5 years and is down A LOT recently...

Sincerely,
VM
Title: Re: 2017 q4 result out!
Post by: Cigarbutt on February 17, 2018, 11:12:12 AM
Sure. Will keep going in this thread as it is relevant to FFH also.

AHL (Aspen Holdings) is now trading at a slight discount to book value. The relatively long operating history, relatively low NPW to equity and relatively high investment per share (at +/- 3$ per share at end of 2017) would suggest that the shares are undervalued.

The following comments will focus on the underwriting side and not on the investment side of AHL.
-The positives.
They seem to show discipline in the sense that they have not grown tremendously in the last few years in a market that has been quite soft and in the sense that they have often backed words with action by switching capital around different opportunities (within insurance lines and allocation between insurance vs reinsurance).
AHL has a relative focus on specialty niches.
-The negatives.
My take is that, over time, AHL has not produced combined ratios significantly better than the industry and has had its fair share of negative underwriting results related to catastrophes.
In the last few years, the trend in their underwriting result has been unfavorable and has included positive reserve developments which can not be considered to be fixed features.

Overall, on the underwriting side, I think it may be reasonable to expect that AHL will continue to be an average performer or slightly better. However, AHL has existed (since 2002) in a period where industry net reseve movement has been favorable (very unusual period in terms of extent and duration of phenomeneon which would imply a very soft market). One would have to assess how AHL would differentiate itself from the industry if reserve deficiencies would become the norm for a while, especially for the longer tail liabilities. In a tougher environment, they would have to compete with survivors and with parties coming with "clean capital" just like they did when they formed in 2002.

To link with the present topic, unlike FFH, AHL has grown organically. FFH has grown mostly through acquisitions and that comes with its own set of challenges but FFH combined ratio numbers from the last 5 to 7 years compare favorably to AHL. The biggest differentiator may lie in the capacity for Fairfax to fully participate in a hardening market.

Makes sense?

Title: Re: 2017 q4 result out!
Post by: Spekulatius on February 17, 2018, 01:59:16 PM
I agree with Cardboard here - I owned some AHL (purchased  the recent downdraft) and decided to sell for a small loss. I added to ACS and FFH instead, which ai think have a better outlook.

I sort of agree on FFH too, the results are too lumpy and just overall not good. Theüey should sell their crap investments and stuff like Blackberry and RFP and purchase something solid instead. Running an insurance company that  has reasonable underwriting isn’t really as hard as they make it, IMO.
Title: Re: 2017 q4 result out!
Post by: Dazel on February 18, 2018, 09:45:44 AM

Cigarbutt,

With all due respect when you have record investment gains you have the optionality of sandbagging one time expenses against those gains. No one in industry had per share investment gains like Fairfax did. No one is even close! Has the entire board decided to just forget this fact?

They still had a record year....If I were running Fairfax I would have taken massive reserves this year....what an opportunity.

Speculitus,

Of course we want to see a couple of years of good solid earnings and underwriting...that’s how the revaluation happens....people are disappointed here I get it.

They had a record year and their long term record is amongst the best in the world...what is that worth? Well everyone will have to decide for themselves. Fairfax knows so we will see shares get bought back by the boat load.

My opinion...everyone’s is free to make their own.

Good luck all.

Dazel
Title: Re: 2017 q4 result out!
Post by: Spekulatius on February 18, 2018, 03:07:45 PM

Cigarbutt,

With all due respect when you have record investment gains you have the optionality of sandbagging one time expenses against those gains. No one in industry had per share investment gains like Fairfax did. No one is even close! Has the entire board decided to just forget this fact?

They still had a record year....If I were running Fairfax I would have taken massive reserves this year....what an opportunity.

Speculitus,

Of course we want to see a couple of years of good solid earnings and underwriting...that’s how the revaluation happens....people are disappointed here I get it.

They had a record year and their long term record is amongst the best in the world...what is that worth? Well everyone will have to decide for themselves. Fairfax knows so we will see shares get bought back by the boat load.

My opinion...everyone’s is free to make their own.

Good luck all.

Dazel

It was worth a buy of a few more shares for me this Friday, but my exposure so far to FFH is small. I would not buy more, if my exposure were already fully sized or oversized.
Title: Re: 2017 q4 result out!
Post by: Cigarbutt on February 18, 2018, 05:58:55 PM
"If I were running Fairfax I would have taken massive reserves this year....what an opportunity."
It's OK to keep your opinion on the topic.
I just want to underline that the decision to invest or not in Fairfax would be very easy if reserves would be "adjusted".

BTW, in the news release, they document the net prior years reserve development (for the different subs).
My take is that the 2017 numbers are in line with previous years and do not show what could be considered opportunistic over-reserving.
YoY, the reserve redundancy is lower and that is well explained by the single casualty surprise at Allied World in Q4 and by the general decline of reserves released at the industry level.

From the owner's manual (Mr. Buffett):
"At Berkshire you will find no “big bath” accounting maneuvers or restructurings nor any “smoothing” of quarterly or annual results. We will always tell you how many strokes we have taken on each hole and never play around with the scorecard. When the numbers are a very rough “guesstimate,” as they necessarily must be in insurance reserving, we will try to be both consistent and conservative in our approach."  (my bold)
Title: Re: 2017 q4 result out!
Post by: ABM on February 19, 2018, 07:38:20 PM
One data point from the release that continues to bug me is the repo activity. 

On the Q3 call Prim made a point to say the deviation between IV and book had never been wider in the 32 year history of FFH.  He then highlighted the Q4 (subsequent to period end) activity on the call noting 166k shares were repurchased in October for $87M.  So basically I thought we were going to see bigger number than we did because just 18k shares were purchased following the Q3 call bringing the Q4 activity to 184k shares or $94M. 

Given the big AT cash flows from the asset sales, this level of repo I found disappointing because what better message to send to the market.  Also on the 08/24/17 asset sale call he explicitly stated "the first use of that (cash) will be our stock".

Any thoughts?
Title: Re: 2017 q4 result out!
Post by: petec on February 20, 2018, 12:39:42 AM
ABM I'm inclined to agree. However, I have one nagging thought. Prem has mentioned how Singleton went from being an acquisition bandit to buying back shares at Teledyne. But both those phases lasted years. Prem is saying he is done with deals and will buy back stock. We all think he means now. But its possible he's signalling the focus for the next decade. NB this is nothing more than a guess.
Title: Re: 2017 q4 result out!
Post by: Spekulatius on February 20, 2018, 04:19:24 AM
I would rather have FFH deliver their balance sheet a bit and reduce of the preferred or debt at the holding company.

There should not be a grand plan with respect to stock buybacks either, it should be done opportunistically. They should just communicate a value framework like BRK (multiple of book) and then purchase back stock when the criteria are met
Title: Re: 2017 q4 result out!
Post by: FairFacts on February 20, 2018, 07:25:41 AM
ABM and Petec,

I was a little surprised too at the low level of repurchases, these are total guesses as to why:

1. We were able to refinance existing debt at 7.5% with new debt at 4.25% in December, was that because of improved debt ratings? The increase in holding company cash would have helped with this.
2. Also, we increased the LOC from $1bil to $2bil maybe getting better terms due to 1. above.
3. Fairfax India has announced that it will go back to the market for $1.5bil, will FFH maintain its existing percentage holding which will cost $495m for its share of the new issue?
4. Finally, are they worried about the AWH performance and being ultra conservative until they see how things go?

Other than that Prem has consistently stated that they would be buying back stock opportunistically, the current price in my view is very opportunistic indeed so why the delay?
Title: Re: 2017 q4 result out!
Post by: ourkid8 on February 20, 2018, 09:18:25 AM
Why is FFH not repurchasing CAD shares instead of USD?  The CAD shares have significant more liquidity compared to the USD (Bid: $495 and Ask: $550)   Maybe that has something to do with the low level of repurchases?

ABM and Petec,

I was a little surprised too at the low level of repurchases, these are total guesses as to why:

1. We were able to refinance existing debt at 7.5% with new debt at 4.25% in December, was that because of improved debt ratings? The increase in holding company cash would have helped with this.
2. Also, we increased the LOC from $1bil to $2bil maybe getting better terms due to 1. above.
3. Fairfax India has announced that it will go back to the market for $1.5bil, will FFH maintain its existing percentage holding which will cost $495m for its share of the new issue?
4. Finally, are they worried about the AWH performance and being ultra conservative until they see how things go?

Other than that Prem has consistently stated that they would be buying back stock opportunistically, the current price in my view is very opportunistic indeed so why the delay?
Title: Re: 2017 q4 result out!
Post by: ABM on February 20, 2018, 10:29:44 AM
Mgmt has implied they are comfortable with BS leverage so against this assumption you would expect more repo activity unless the expected return on other investments is that much higher. 

At current levels, I see a 14% yield on cost for repos that delivers a 19% IRR if you re-rate to 1.5x assuming the capital base earns a AT 15% ROE.  How many investments offer that level of returns in this environment when adjusting for the risk? Not much risk in repurchasing your own stock.
Title: Re: 2017 q4 result out!
Post by: StubbleJumper on February 20, 2018, 11:10:40 AM
Mgmt has implied they are comfortable with BS leverage so against this assumption you would expect more repo activity unless the expected return on other investments is that much higher. 

At current levels, I see a 14% yield on cost for repos that delivers a 19% IRR if you re-rate to 1.5x assuming the capital base earns a AT 15% ROE.  How many investments offer that level of returns in this environment when adjusting for the risk? Not much risk in repurchasing your own stock.


Yes, FFH's own shares are amongst the best deals available in the market today.  Hopefully they seize the opportunity to buy 1.5m or 2m of shares while they are trading near book.


SJ
Title: Re: 2017 q4 result out!
Post by: StubbleJumper on February 20, 2018, 11:12:09 AM
Why is FFH not repurchasing CAD shares instead of USD?  The CAD shares have significant more liquidity compared to the USD (Bid: $495 and Ask: $550)   Maybe that has something to do with the low level of repurchases?

ABM and Petec,

I was a little surprised too at the low level of repurchases, these are total guesses as to why:

1. We were able to refinance existing debt at 7.5% with new debt at 4.25% in December, was that because of improved debt ratings? The increase in holding company cash would have helped with this.
2. Also, we increased the LOC from $1bil to $2bil maybe getting better terms due to 1. above.
3. Fairfax India has announced that it will go back to the market for $1.5bil, will FFH maintain its existing percentage holding which will cost $495m for its share of the new issue?
4. Finally, are they worried about the AWH performance and being ultra conservative until they see how things go?

Other than that Prem has consistently stated that they would be buying back stock opportunistically, the current price in my view is very opportunistic indeed so why the delay?


Holy smokes!  That's quite a spread.  Was it just a bid-ask before this morning's bell, or was it an actual spread during the trading day?
Title: Re: 2017 q4 result out!
Post by: ourkid8 on February 20, 2018, 11:16:11 AM
It was this morning during the trading day.  Right now it is not as bad (Bid: $510 and Ask: $520)... My question is, why did they only purchase shares in USD instead of CAD?  Due to the spread , I can understand why they were unable to buy a lot more shares -There is hardly any liquidity in USD!

Why is FFH not repurchasing CAD shares instead of USD?  The CAD shares have significant more liquidity compared to the USD (Bid: $495 and Ask: $550)   Maybe that has something to do with the low level of repurchases?

ABM and Petec,

I was a little surprised too at the low level of repurchases, these are total guesses as to why:

1. We were able to refinance existing debt at 7.5% with new debt at 4.25% in December, was that because of improved debt ratings? The increase in holding company cash would have helped with this.
2. Also, we increased the LOC from $1bil to $2bil maybe getting better terms due to 1. above.
3. Fairfax India has announced that it will go back to the market for $1.5bil, will FFH maintain its existing percentage holding which will cost $495m for its share of the new issue?
4. Finally, are they worried about the AWH performance and being ultra conservative until they see how things go?

Other than that Prem has consistently stated that they would be buying back stock opportunistically, the current price in my view is very opportunistic indeed so why the delay?


Holy smokes!  That's quite a spread.  Was it just a bid-ask before this morning's bell, or was it an actual spread during the trading day?
Title: Re: 2017 q4 result out!
Post by: StubbleJumper on February 20, 2018, 11:19:24 AM
It was this morning during the trading day.  Right now it is not as bad (Bid: $510 and Ask: $520)... My question is, why did they only purchase shares in USD instead of CAD?  Due to the spread , I can understand why they were unable to buy a lot more shares -There is hardly any liquidity in USD!

Why is FFH not repurchasing CAD shares instead of USD?  The CAD shares have significant more liquidity compared to the USD (Bid: $495 and Ask: $550)   Maybe that has something to do with the low level of repurchases?

ABM and Petec,

I was a little surprised too at the low level of repurchases, these are total guesses as to why:

1. We were able to refinance existing debt at 7.5% with new debt at 4.25% in December, was that because of improved debt ratings? The increase in holding company cash would have helped with this.
2. Also, we increased the LOC from $1bil to $2bil maybe getting better terms due to 1. above.
3. Fairfax India has announced that it will go back to the market for $1.5bil, will FFH maintain its existing percentage holding which will cost $495m for its share of the new issue?
4. Finally, are they worried about the AWH performance and being ultra conservative until they see how things go?

Other than that Prem has consistently stated that they would be buying back stock opportunistically, the current price in my view is very opportunistic indeed so why the delay?


Holy smokes!  That's quite a spread.  Was it just a bid-ask before this morning's bell, or was it an actual spread during the trading day?


FFH does its financial reporting in US dollars, so any buybacks will be converted (if necessary) to US dollars before being disclosed in the quarterly or in a presser.  But, I don't recall ever seeing any text from FFH stating whether their buybacks were done on the TSX or US markets.  Do you have a presser that you recall seeing that in?


SJ
Title: Re: 2017 q4 result out!
Post by: ourkid8 on February 20, 2018, 11:27:42 AM
No.  I assumed they were repurchasing USD shares based on the below statement: (However, I did realize they are reporting their finances in USD but I did not realize they could be converting the amount for share repurchases from CAD to USD) - Thanks!

During the fourth quarter of 2017, the company repurchased for cancellation 184,367 subordinate voting shares under the terms of its normal course issuer bids at a cost of $96.2 (approximately $522 per subordinate voting share).

It was this morning during the trading day.  Right now it is not as bad (Bid: $510 and Ask: $520)... My question is, why did they only purchase shares in USD instead of CAD?  Due to the spread , I can understand why they were unable to buy a lot more shares -There is hardly any liquidity in USD!

Why is FFH not repurchasing CAD shares instead of USD?  The CAD shares have significant more liquidity compared to the USD (Bid: $495 and Ask: $550)   Maybe that has something to do with the low level of repurchases?

ABM and Petec,

I was a little surprised too at the low level of repurchases, these are total guesses as to why:

1. We were able to refinance existing debt at 7.5% with new debt at 4.25% in December, was that because of improved debt ratings? The increase in holding company cash would have helped with this.
2. Also, we increased the LOC from $1bil to $2bil maybe getting better terms due to 1. above.
3. Fairfax India has announced that it will go back to the market for $1.5bil, will FFH maintain its existing percentage holding which will cost $495m for its share of the new issue?
4. Finally, are they worried about the AWH performance and being ultra conservative until they see how things go?

Other than that Prem has consistently stated that they would be buying back stock opportunistically, the current price in my view is very opportunistic indeed so why the delay?


Holy smokes!  That's quite a spread.  Was it just a bid-ask before this morning's bell, or was it an actual spread during the trading day?


FFH does its financial reporting in US dollars, so any buybacks will be converted (if necessary) to US dollars before being disclosed in the quarterly or in a presser.  But, I don't recall ever seeing any text from FFH stating whether their buybacks were done on the TSX or US markets.  Do you have a presser that you recall seeing that in?


SJ
Title: Re: 2017 q4 result out!
Post by: cwericb on February 20, 2018, 11:50:40 AM
Results came out on the 15th.

On the 16th, Crip and I both pointed out that there often seems to be a time lag between the time the results come out and share price movement.

Share price has barely moved until today and now pops 4-5%. This happens quite frequently and is almost like having advance knowledge of the results.
Title: Re: 2017 q4 result out!
Post by: Viking on February 20, 2018, 12:23:46 PM
Results came out on the 15th.

On the 16th, Crip and I both pointed out that there often seems to be a time lag between the time the results come out and share price movement.

Share price has barely moved until today and now pops 4-5%. This happens quite frequently and is almost like having advance knowledge of the results.

+1
Title: Re: 2017 q4 result out!
Post by: gokou3 on February 20, 2018, 12:51:41 PM
Results came out on the 15th.

On the 16th, Crip and I both pointed out that there often seems to be a time lag between the time the results come out and share price movement.

Share price has barely moved until today and now pops 4-5%. This happens quite frequently and is almost like having advance knowledge of the results.

I wonder if it is due to the re-opening of the share buyback window after earning release?  Trading volume for FFH is low, so even at Q4's buyback pace that represented a few % of daily volume.
Title: Re: 2017 q4 result out!
Post by: StubbleJumper on February 20, 2018, 01:02:31 PM
Results came out on the 15th.

On the 16th, Crip and I both pointed out that there often seems to be a time lag between the time the results come out and share price movement.

Share price has barely moved until today and now pops 4-5%. This happens quite frequently and is almost like having advance knowledge of the results.

I wonder if it is due to the re-opening of the share buyback window after earning release?  Trading volume for FFH is low, so even at Q4's buyback pace that represented a few % of daily volume.


My vague recollection is that there was a presser last year saying that FFH engaged an investing outfit somewhere to continue to do a systematic buyback even during the quiet period.  Has my memory failed me?

EDIT:  Yes, I found it:

TORONTO, Sept. 29, 2017 (GLOBE NEWSWIRE) -- Fairfax Financial Holdings Limited (“Fairfax”) (TSX:FFH) (TSX:FFH.U) announces that, in connection with its previously announced normal course issuer bid effective September 28, 2017 (the “NCIB”), it has entered into an automatic share purchase plan (the “ASPP”) with a designated broker to allow for the purchase of its Subordinate Voting Shares under the NCIB at times when Fairfax normally would not be active in the market due to applicable regulatory restrictions or internal trading black-out periods. Before the commencement of any particular internal trading black-out period, Fairfax may, but is not required to, instruct its designated broker to make purchases of Subordinate Voting Shares under the NCIB during the ensuing black-out period in accordance with the terms of the ASPP.  Such purchases will be determined by the broker in its sole discretion based on parameters established by Fairfax prior to commencement of the applicable black-out period in accordance with the terms of the ASPP and applicable Toronto Stock Exchange rules. Outside of these black-out periods, Subordinate Voting Shares will continue to be purchasable by Fairfax at its discretion under its NCIB.

The ASPP commenced on September 28, 2017 and will terminate on the earliest of the date on which: (a) the maximum annual purchase limit under the NCIB has been reached; (b) the NCIB expires; or (c) Fairfax terminates the ASPP in accordance with its terms. The ASPP constitutes an “automatic securities purchase plan” under applicable Canadian securities laws.

Fairfax is a holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance and investment management.

For further information contact:    John Varnell, Vice President, Corporate Development,
    at (416) 367-4941



SJ
Title: Re: 2017 q4 result out!
Post by: petec on February 22, 2018, 02:05:54 AM
As I have mentioned countless times, there is no ROE generated if you exclude capital gains. So to trade well above book and generate the respect that you guys seek they have 2 choices:

1- Grow really fast like in the late 80's and 90's by acquiring company after company with an overvalued currency.
2- Generate a portion of the return via sound, repeatable earnings. That means low cost, less interest paid, profitable underwriting and more deployed into sound investments with the blessings of regulators.


I think this makes a lot of sense. But I also think #2 is starting to be built. Compare the $425m of interest and dividend income reported for 2017 with what we (think we) know about the underlying portfolio:
- $9bn in bonds gets you $270m even if they're all in the 10-year - the real number will be higher.
- with the 2-year at 2.25% the $20bn in cash has earnings power of $450m without taking any real risk.
- $750m prefs and debentures announced in 2017 at 5-6% so about $40m of income - assuming they all got drawn - I am not sure if they did.
- $500m of committed investment at Arena (assuming Westaim drew all three tranches of prefs) earns 12% for another $60m once it is all deployed - or more if Arena levers as Zwirn's old shop did.

Add some dividends on stocks and you've more than doubled the 2017 reported number over a fixed holdco+interest cost base. Add consistent underwriting at say 98%, some cash flows from non-insurance subsids, some fees from FIH and FAH, and refinance your debts at lower rates, and you're starting to generate a base of sound, repeatable earnings. Not enough to justify much over 1x book, but the trend is in the right direction.

Not that it bothers me much - I am very happy to hold at book value and have my returns come from the investing side.
Title: Re: 2017 q4 result out!
Post by: Cardboard on February 22, 2018, 03:03:57 AM
Good post Petec.

If they continue heading in that direction, it will work out but, it will take time for the market to consider this the new state. Buffett has done it for decades now and it does not trade at a large multiple of book value.

And these bonds or cash holdings are not permanent positions like a Precision Castparts or a BNSF. These will be sold or invested elsewhere.

So yes, if they do well and earn money, the stock should follow that rate of progress. However, to call Fairfax a table pounding opportunity at this point because it should pop and simply trade at a much higher multiple of book is wrong IMO.

Actually the market is likely making a favour to these people if they are true investors and not just looking for a quick exit or instant gratification since it allows to repurchase shares at a reasonable price which combined with a potentially profitable future that we just alluded to leads to a higher investment return.

Cardboard
Title: Re: 2017 q4 result out!
Post by: Spekulatius on February 22, 2018, 04:06:54 AM
Once sound underwriting is in place, they can easily generate 8-10% ROE just with solid income from bonds and investments - no home runs needed. That is the model thwt most insurance companies work towards like WRB or TRV (to name a few good ones) and they are doing quite well now and will do even better with higher interest rates.

If they are doing well on the investment side, they probably can do a mid teens ROE and then they would deserve a 1.5-2x book value.
Title: Re: 2017 q4 result out!
Post by: petec on February 22, 2018, 04:51:57 AM
And these bonds or cash holdings are not permanent positions like a Precision Castparts or a BNSF. These will be sold or invested elsewhere.

Agreed. That said, in the hands of competent investors (and I realise we all have different views about whether that applies here) investments that can be changes ought to compound faster than those that can't. Now, you might not get a premium to BV (on the basis that the portfolio can be replicated at BV externally) but you still compound faster. I am quite happy not to have *too* much money caught up in big operating business.

Totally agree about a pop above BV. That's not the core of the opportunity here.
Title: Re: 2017 q4 result out!
Post by: StubbleJumper on February 22, 2018, 06:29:32 AM
Good post Petec.

If they continue heading in that direction, it will work out but, it will take time for the market to consider this the new state. Buffett has done it for decades now and it does not trade at a large multiple of book value.

And these bonds or cash holdings are not permanent positions like a Precision Castparts or a BNSF. These will be sold or invested elsewhere.

So yes, if they do well and earn money, the stock should follow that rate of progress. However, to call Fairfax a table pounding opportunity at this point because it should pop and simply trade at a much higher multiple of book is wrong IMO.

Actually the market is likely making a favour to these people if they are true investors and not just looking for a quick exit or instant gratification since it allows to repurchase shares at a reasonable price which combined with a potentially profitable future that we just alluded to leads to a higher investment return.

Cardboard



Cardboard, two or three days ago, FFH was trading pretty much bang-on at book value.  My heuristic for BV (or at least a BV that is mostly tangible) is that this is the point where the business as a going concern offers zero value.  This is the point where, if one could liquidate the assets for a "fair price" and put the business in run-off, you'd be equally well off to do so.

So, I'd say that FFH deserves to trade above book.  There's plenty of room to debate about how much above book it ought to trade, but my take is that this thing is not worth more dead than alive.


SJ
Title: Re: 2017 q4 result out!
Post by: Txvestor on February 22, 2018, 07:00:04 AM
Good post Petec.

If they continue heading in that direction, it will work out but, it will take time for the market to consider this the new state. Buffett has done it for decades now and it does not trade at a large multiple of book value.

And these bonds or cash holdings are not permanent positions like a Precision Castparts or a BNSF. These will be sold or invested elsewhere.

So yes, if they do well and earn money, the stock should follow that rate of progress. However, to call Fairfax a table pounding opportunity at this point because it should pop and simply trade at a much higher multiple of book is wrong IMO.

Actually the market is likely making a favour to these people if they are true investors and not just looking for a quick exit or instant gratification since it allows to repurchase shares at a reasonable price which combined with a potentially profitable future that we just alluded to leads to a higher investment return.

Cardboard



Cardboard, two or three days ago, FFH was trading pretty much bang-on at book value.  My heuristic for BV (or at least a BV that is mostly tangible) is that this is the point where the business as a going concern offers zero value.  This is the point where, if one could liquidate the assets for a "fair price" and put the business in run-off, you'd be equally well off to do so.

So, I'd say that FFH deserves to trade above book.  There's plenty of room to debate about how much above book it ought to trade, but my take is that this thing is not worth more dead than alive.


SJ

Agree with you on this stuble. In addition the recent subsidiary sales transactions demonstrated value above BV as well. I think the market here is discounting recent poor investment performance and extrapolating that into the future. I can't say that is unreasonable. MKL deserves their stock price being above BV. They have invested well, acquired non-dilutively, and outperformed the markets consistently. If Fairfax does that for 5 yr, they will rerate as well. Will that happen? I am not so sure. But the investment thesis here is thet even without hitting it out of the park, they should be able to consistently grow BV 10-12% a year, a feat that has eluded them over recent times. Even that would get them to a higer multiple than 1BV. Prem just has to make sure he doesn't trip over his shoelaces yet again.
Title: Re: 2017 q4 result out!
Post by: petec on February 22, 2018, 07:30:31 AM
Cardboard, two or three days ago, FFH was trading pretty much bang-on at book value.  My heuristic for BV (or at least a BV that is mostly tangible) is that this is the point where the business as a going concern offers zero value.  This is the point where, if one could liquidate the assets for a "fair price" and put the business in run-off, you'd be equally well off to do so.


Surely it should trade at 1xBV if the ROE=your cost of capital? If, for example, it generates a ROE of 10% but you've got a stack of ideas that offer a 20% return, you'd pay 0.5x book. If it generates 7% and your threshold is 7%, then you'd pay 1x.

Putting it another way, it is true to say that at BV the business is worth an equal amount as a going concern or liquidated, but only if the proceeds of liquidation are put into something else that generates your required rate of return. But it is not true to say that a business generating a 0% ROE, or a 2% ROE, is worth 1x BV whether it is kept going or liquidated. If the ROE is below your cost of capital then the business is only worth 1xBV if it is liquidated. If not, it is worth less.

Fairfax, assuming a fair long run return on a broad basket of stocks is 7%, should trade on 1xBV if the ROE is 7%. If the ROE is higher based on operating earnings then you could argue for a higher multiple, but that's not so easy if the higher ROE is based on investing results because you can, to an extent, replicate Fairfax's investments at 1xBV. The only reason you'd pay >1xBV for investment results is if the managers had an exceptional record and you couldn't successfully replicate the portfolio. So for example, if FFH puts their $20bn of cash to work in the 2y treasury you wouldn't pay >1xBV for that - but you might pay >1xBV for the investments where they have an advantaged position as a preferred provider of capital.

Oddly, therefore, 1xBV or not much higher might be the right price for FFH even if the equity compounds at 15%. It takes a bit to get my head round that but I think it's mathematically true. It's actually what I find very attractive about the stock - the likelihood that it will remain reasonably priced while compounding nicely.

Title: Re: 2017 q4 result out!
Post by: racemize on February 22, 2018, 07:40:21 AM
Oddly, therefore, 1xBV or not much higher might be the right price for FFH even if the equity compounds at 15%. It takes a bit to get my head round that but I think it's mathematically true. It's actually what I find very attractive about the stock - the likelihood that it will remain reasonably priced while compounding nicely.

I see where you get to this, but the market does not value other businesses this way (e.g., see MKL or BRK)
Title: Re: 2017 q4 result out!
Post by: petec on February 22, 2018, 07:54:08 AM
Oddly, therefore, 1xBV or not much higher might be the right price for FFH even if the equity compounds at 15%. It takes a bit to get my head round that but I think it's mathematically true. It's actually what I find very attractive about the stock - the likelihood that it will remain reasonably priced while compounding nicely.

I see where you get to this, but the market does not value other businesses this way (e.g., see MKL or BRK)

Arguably BRK is pretty cheap on BV compared to its historic returns. But I agree. It is quite possible the market will value FFH on a much higher multiple at some point. In fact it's highly likely, given how moody the market is. I'm simply saying that a potential multiple pop is not the reason I hold the stock. It's gravy.
Title: Re: 2017 q4 result out!
Post by: Cardboard on February 22, 2018, 08:08:51 AM
"I see where you get to this, but the market does not value other businesses this way (e.g., see MKL or BRK)"

BRK ok and we know that it is much more than an insurer investing money. I would suggest that MKL is overvalued: any misstep will cause a rapid and painful derating.

Cardboard
Title: Re: 2017 q4 result out!
Post by: StubbleJumper on February 22, 2018, 08:19:51 AM
Cardboard, two or three days ago, FFH was trading pretty much bang-on at book value.  My heuristic for BV (or at least a BV that is mostly tangible) is that this is the point where the business as a going concern offers zero value.  This is the point where, if one could liquidate the assets for a "fair price" and put the business in run-off, you'd be equally well off to do so.


Surely it should trade at 1xBV if the ROE=your cost of capital? If, for example, it generates a ROE of 10% but you've got a stack of ideas that offer a 20% return, you'd pay 0.5x book. If it generates 7% and your threshold is 7%, then you'd pay 1x.

Putting it another way, it is true to say that at BV the business is worth an equal amount as a going concern or liquidated, but only if the proceeds of liquidation are put into something else that generates your required rate of return. But it is not true to say that a business generating a 0% ROE, or a 2% ROE, is worth 1x BV whether it is kept going or liquidated. If the ROE is below your cost of capital then the business is only worth 1xBV if it is liquidated. If not, it is worth less.

Fairfax, assuming a fair long run return on a broad basket of stocks is 7%, should trade on 1xBV if the ROE is 7%. If the ROE is higher based on operating earnings then you could argue for a higher multiple, but that's not so easy if the higher ROE is based on investing results because you can, to an extent, replicate Fairfax's investments at 1xBV. The only reason you'd pay >1xBV for investment results is if the managers had an exceptional record and you couldn't successfully replicate the portfolio. So for example, if FFH puts their $20bn of cash to work in the 2y treasury you wouldn't pay >1xBV for that - but you might pay >1xBV for the investments where they have an advantaged position as a preferred provider of capital.

Oddly, therefore, 1xBV or not much higher might be the right price for FFH even if the equity compounds at 15%. It takes a bit to get my head round that but I think it's mathematically true. It's actually what I find very attractive about the stock - the likelihood that it will remain reasonably priced while compounding nicely.


1) They'll do better than ~7% ROE, which is why this thing is worth more alive than dead.  But, yes, if you think that their results will be sufficiently low, then it's worth less than BV.  The market is priced for FFH to perform with mediocrity.

2) You might very well pay FFH more than BV to invest in 2 year bonds because they have cost-free leverage from their float -- in fact, it's more than cost free leverage because they have every expectation of writing a CR < 100.  I do not know of any way that an individual investor can replicate cost-free leverage.

3) Haven't you slightly contradicted yourself?  You first (correctly) posited that if FFH's expected long-term ROE is ~7% it might actually just be worth roughly book.  We can quibble about whether 7% is the exact number, but I'd say your logic reasonable.  And then you close out your post by saying that if ROE is compounded by ~15% that 1x BV might be roughly right.  So which is it?  It strikes me that FFH is worth a great deal more than book if one truly believes all of that talk of a long-term expected ROE of 15%.



SJ


Title: Re: 2017 q4 result out!
Post by: petec on February 22, 2018, 09:15:20 AM

1) They'll do better than ~7% ROE, which is why this thing is worth more alive than dead.  But, yes, if you think that their results will be sufficiently low, then it's worth less than BV.  The market is priced for FFH to perform with mediocrity.

2) You might very well pay FFH more than BV to invest in 2 year bonds because they have cost-free leverage from their float -- in fact, it's more than cost free leverage because they have every expectation of writing a CR < 100.  I do not know of any way that an individual investor can replicate cost-free leverage.

3) Haven't you slightly contradicted yourself?  You first (correctly) posited that if FFH's expected long-term ROE is ~7% it might actually just be worth roughly book.  We can quibble about whether 7% is the exact number, but I'd say your logic reasonable.  And then you close out your post by saying that if ROE is compounded by ~15% that 1x BV might be roughly right.  So which is it?  It strikes me that FFH is worth a great deal more than book if one truly believes all of that talk of a long-term expected ROE of 15%.


1. Agreed.

2. That's a fair point. I just have a sense that, insurance being the highly competitive, impenetrable, and volatile business that it is, people don't attach big book value premiums to 97% or 98% combined ratios. 80%, sure, but in the high 90's (which is where I guess Fairfax will come out in the long run) I think it's too hard to understand why the advantage exists, and too volatile (losses in bad years can be huge if the average is 98%) and I don't think that gets you a big premium. I'll be delighted if I am wrong.

3. My point is that it is quite possible for a business to be worth 1x BV but to compound at 15%. I realise that's a very unorthodox statement but if the majority of the return comes from investments that can be easily replicated in the market at 1x BV, then it is true. It is not true if the majority of the return comes from operating earnings or irreplicable investments.

Overall, then, I see Fairfax somewhere in the 1-1.5x book range. Over 1x because of the cheap leverage, profitable underwriting, and investment record. But not over 1.5x because of the black box nature of insurance and the replicability of much of the portfolio.

I realise a 50% gain to 1.5x would be wildly exciting to plenty of people on here. I can easily see that happening if they have another couple of good years. But personally I couldn't care less and would probably rather the multiple didn't rise, because I intend to hold this one for a VERY long time and would be happy to keep buying at 1x (and for years of buybacks to steadily reduce the share count a la Teledyne).

Still, its refreshing to be on the bearish end of a Fairfax discussion for once ;)
Title: Re: 2017 q4 result out!
Post by: FFHWatcher on February 22, 2018, 11:57:18 AM
Can you imagine a stock that is $5.50 and then 20 years it is up to $6.50 ?

That's Fairfax if you move the decimal point.  Perhaps the next 20 years will be different than the previous years and a lot of great things have happened at FFH during that time yet here we are, 20 years later with a similar stock price.  The company is a lot different today, there have been dividends, cat losses, hedging gains, hedging losses, etc. but a lot of people in 1997 and 1998 said the exact same thing you just said (I will hold FFH for a VERY long time). 
I also heard the same scenario about 15 years ago that I am hearing today... 'If FFH only invests their cash in bonds at x%, what will be the earnings?'  Huge!! 
20 years is a long time.
Title: Re: 2017 q4 result out!
Post by: StubbleJumper on February 22, 2018, 12:08:05 PM
Can you imagine a stock that is $5.50 and then 20 years it is up to $6.50 ?

That's Fairfax if you move the decimal point.  Perhaps the next 20 years will be different than the previous years and a lot of great things have happened at FFH during that time yet here we are, 20 years later with a similar stock price.  The company is a lot different today, there have been dividends, cat losses, hedging gains, hedging losses, etc. but a lot of people in 1997 and 1998 said the exact same thing you just said (I will hold FFH for a VERY long time). 
I also heard the same scenario about 15 years ago that I am hearing today... 'If FFH only invests their cash in bonds at x%, what will be the earnings?'  Huge!! 
20 years is a long time.


Sure, you might have heard that 15 years ago.  But as I recall, I bought a few shares right around Martin Luther King day almost exactly 15 years ago and I paid less than cdn$100. 

Purchase price matters greatly.


SJ
Title: Re: 2017 q4 result out!
Post by: Santayana on February 22, 2018, 12:44:22 PM
And on a 25 year timeframe it's a 10 bagger.
Title: Re: 2017 q4 result out!
Post by: Cigarbutt on February 22, 2018, 01:07:34 PM
20 years is a long time.
I've done very well with Fairfax and related holdings during the time period but the result has occurred in the context of a variable level of ownership.
Often hoped for a stable long term position but the ingredients have never been assembled (so far).

Thank you for the post FFHWatcher.
Perspective helps.

In 1997:
NPW=1392,6 (million CDN)
Total investments=4054,1 (million USD)
SO=11,1 (million shares)

In 2017:
NPW=9983,5 (million USD)
Total investments=39381,6 (million USD)
SO=27,8 (million shares)

Then, FFH was getting ready to acquire CFI and TIG.
Now, FFH is getting ready to play offense.

Humble tentative conclusion: the earning power has been multiplied and the P/B premium that needs to be applied is in large part a function of float deployment. 

Title: Re: 2017 q4 result out!
Post by: petec on February 23, 2018, 12:45:44 AM
A lot of people in 1997 and 1998 said the exact same thing you just said (I will hold FFH for a VERY long time). 

Well, those people were dumb (apologies to anyone I've just called dumb!). If Fairfax gets back to the P/BV that it was at then, I won't hold it for a very long time. I know I didn't explicitly state that, but it's what I was getting at when I said I hoped the multiple would not rise. Price is (almost) everything and every statement about holding period should be viewed through a price lens.
Title: Re: 2017 q4 result out!
Post by: FairFacts on February 23, 2018, 09:42:50 AM
my two cents...

BRK is currently valued at 1.6x BV
MKL is currently valued at 1.7x BV
FFH is currently valued at 1.1x BV (and even less if you add the unbooked adjustments to FMV of TC/Quess and FIH).

WB has always said that at 1.2x his company is undervalued and at 2x it is overvalued. I imply that the mid point 1.6x is his idea of FMV.

In my view FFH is so thinly covered by analysts and trades such low volumes its entirely possible (probable) that it is mispriced.

As they digest AWH, getting the under writing under control (AWH and BRIT), leverage the float AND grow revenues into a better market the insurance businesses look well placed to do really well over the next few years. Looking at some of the larger investments, BB, TC/Quess, FIH and Gravalia there is the possibility of some serious upside. Having dropped the hedging and winding down the CPI options we'll get a chance to see FFH for what it can really do. The market could wake up at any time and award this the multiple it deserves.

For me, the most compelling source of information is the conference calls and listening directly to PW. He has changed his emphasis notably this year:
1. Dropping the bond holdings, removing equity hedges, going on the offensive.
2. Still maintaining a conservative posture eg not reaching for yield.
3. Added AWH to the stable and stated that this is the last big acquisition.
4. Repeatedly stated that they will firstly strengthen FFH financial position and then buy back stock. (first part is underway and stock purchases starting slowly).
5. Most importantly on the year-end call he said "$15bil revenue now in place, we expect to generate 15% return to shareholders of about net $70/share"....later in the Q&A he said..."we expect $2bil after tax in 2018". I have never heard him get this close to giving guidance even though he emphatically said he was not and never would issue guidance.

All thats needed now is a liitle proof, if the next few quarters go according to plan I fully expect to see FFH priced at +1.5x BV by the end of the year.



Title: Re: 2017 q4 result out!
Post by: netnet on February 23, 2018, 12:00:51 PM
Close FFH watchers correct me if I'm wrong, (not a close watcher myself) but it seems to me the trade for FFH has been buy at 1.1 or less and sell at 1.4.  This has been a regular trade over the last 6 years or so.
Title: Re: 2017 q4 result out!
Post by: StubbleJumper on February 23, 2018, 01:23:57 PM
Close FFH watchers correct me if I'm wrong, (not a close watcher myself) but it seems to me the trade for FFH has been buy at 1.1 or less and sell at 1.4.  This has been a regular trade over the last 6 years or so.


Yep.  That's about right.  And it's currently about 1x when you make a couple of adjustments to BV.  So, the idea of it moving to 1.2 within a year or 18 months isn't crazy.  And then if BV rises ~10% after the divvy, you could see a healthy return.


SJ
Title: Re: 2017 q4 result out!
Post by: FFHWatcher on February 23, 2018, 02:19:24 PM
Close FFH watchers correct me if I'm wrong, (not a close watcher myself) but it seems to me the trade for FFH has been buy at 1.1 or less and sell at 1.4.  This has been a regular trade over the last 6 years or so.

I am much less sophisticated than that. The point I was trying to make was that historically, FFH has not been one of those 'buy it now and ignore it for 20 years' type of stocks.  While the company has grown significantly in the past 20 years and is a much different company today, historically, it hasn't been a terribly nice stock to buy and hold (except if you have Prem's cost basis and number of shares). 
Going forward hopefully FFH has made the necessary changes to get the company on a steadier more consistent upward trajectory in earnings and in share price than in the past (much more of an earnings machine as opposed to a gamble hedge and hope to hit it big every 6-10 years).
Title: Re: 2017 q4 result out!
Post by: Txvestor on February 23, 2018, 06:33:27 PM
It hasn't been a buy and forget, because of all the missteps HW has made. Were it not for the equity hedges and deflation swaps, BV would easily have been 50% higer. And the multiple to BV would likely have persisted. If you buy here, you are betting that Prem will not do anything value destructive in the next few years. The market has not ruled put that possibility and I think the market is probably right.
They jury remains out on the AWH purchase alone.
To the poster stating he mentioned 2B and $70 per share, I was on the call as well. When an analyst asked, he was clear that this was not guidance. On that I would just say he has also touted 15% annual gains in BV for many years, and keeps saying over the long term, that hasn't happened in post crisis era either.