Author Topic: Fairfax 2020  (Read 134193 times)

petec

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Re: Fairfax 2020
« Reply #30 on: February 14, 2020, 01:30:47 AM »
I never particularly like this release because it's not accompanied by a full quarterly report, so it's a bit tougher to get the entire picture.  I eagerly await the annual report coming in March.  A few preliminary thoughts:

1) What's the deal with insurance operations?  Is it just a coincidence that the favourable development for 2018 and 2019 respectively almost perfectly offset the cats for 2018 and 2019 respectively (see the final two tables at the bottom of the presser)?  Is that a freakish occurrence, or is FFH pulling from the cookie jar to manage the numbers?  Seriously, WEB always said that one of the biggest challenges in P&C investing is trying to assess whether you believe the numbers. 

2) What's the deal with the Gross Written and Net Written in Q4 2019?  Are we not in the midst of a hardening market?  When you look at Q4's numbers, you see a visible bump in their ceding.  Why?  Is it the case that one or more of the subs is capital constrained, but still has plenty of profitable business to write, and is therefore throwing premium at the reinsurers?  What the hell is going on here?  If capital needs to be shifted from one sub to another, then do what needs to be done.  But, it's not at all clear to me that ceding should have increased.

3) It's nice to see a double-digit increase in Net Written.  Fixed income returns might be in the toilet and the CRs might be a little disappointing, but there's still room for growth in operating income if you can push up the underwriting volume.  It would be super nice to see a high single digit increase in Net Written in 2020, coupled with the CR being shaved by a couple of points.  A hardening market might just do that for you?

4) It will be interesting to read the annual letter and to get some colour from the conference call to better understand FFH's view of financial markets.  If Prem and Brian were fussing about broad market valuations three years ago, they must be shitting a brick today.

5) The earnings per share number is nice, but will the market give it any cred?  Quality of earnings over the past couple of years has been a bit suspect, but will anyone care?


Looking forward to the more detailed release in a few weeks.


SJ

Re 2: I think we know for a fact that some subs are capacity constrained, and I donít know how easy it is to move capital between them. Does anyone?
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Dazel

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Re: Fairfax 2020
« Reply #31 on: February 14, 2020, 05:42:10 AM »

Petec,

I donít agree. Rivett has done a great job as a caretaker and lawyer. He is not in the league of Prem
And others at Markel and Berkshire...to take the stock where it should go. I called these earnings last year and a record year...no one cares. SNC Lavalin was a tap in in their backyard...SNC did not need the money but it was the kind of transaction that Buffett like operators make...Fairfax has been asleep. Blackberry is so undervalued it is attributable to Fairfax passive (do nothing) approach....hurting performance instead of helping. It is all great and everything to have a good reputation but as Buffett said about David Winters when he challenged Cokeís board....what has he done for his shareholders?
I am frustrated to say the least....if Prem is done give me a leader. The bones are there....

StubbleJumper

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Re: Fairfax 2020
« Reply #32 on: February 14, 2020, 06:02:10 AM »
I never particularly like this release because it's not accompanied by a full quarterly report, so it's a bit tougher to get the entire picture.  I eagerly await the annual report coming in March.  A few preliminary thoughts:

1) What's the deal with insurance operations?  Is it just a coincidence that the favourable development for 2018 and 2019 respectively almost perfectly offset the cats for 2018 and 2019 respectively (see the final two tables at the bottom of the presser)?  Is that a freakish occurrence, or is FFH pulling from the cookie jar to manage the numbers?  Seriously, WEB always said that one of the biggest challenges in P&C investing is trying to assess whether you believe the numbers. 

2) What's the deal with the Gross Written and Net Written in Q4 2019?  Are we not in the midst of a hardening market?  When you look at Q4's numbers, you see a visible bump in their ceding.  Why?  Is it the case that one or more of the subs is capital constrained, but still has plenty of profitable business to write, and is therefore throwing premium at the reinsurers?  What the hell is going on here?  If capital needs to be shifted from one sub to another, then do what needs to be done.  But, it's not at all clear to me that ceding should have increased.

3) It's nice to see a double-digit increase in Net Written.  Fixed income returns might be in the toilet and the CRs might be a little disappointing, but there's still room for growth in operating income if you can push up the underwriting volume.  It would be super nice to see a high single digit increase in Net Written in 2020, coupled with the CR being shaved by a couple of points.  A hardening market might just do that for you?

4) It will be interesting to read the annual letter and to get some colour from the conference call to better understand FFH's view of financial markets.  If Prem and Brian were fussing about broad market valuations three years ago, they must be shitting a brick today.

5) The earnings per share number is nice, but will the market give it any cred?  Quality of earnings over the past couple of years has been a bit suspect, but will anyone care?


Looking forward to the more detailed release in a few weeks.


SJ

Re 2: I think we know for a fact that some subs are capacity constrained, and I donít know how easy it is to move capital between them. Does anyone?

Many ways to do it, including:

1) Use the dividend capacity already approved by regulators to send a divvy from the capital-rich subs to the holdco and then it's no trouble at all to shift if from the holdco to the capital-poor sub;
2) If the capital poor sub operates in the same jurisdiction as a capital-rich sub, merge them;
3) Float another holdco bond issue for $500m, and sprinkle the proceeds into the subs that require more capacity;

Maybe it's just a one-time freaky thing in Q4 that they were laying off premium on the reinsurers?  But, that's not exactly how I imagined the company attacking a hardening market.


SJ

StubbleJumper

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Re: Fairfax 2020
« Reply #33 on: February 14, 2020, 06:05:58 AM »
Paul Rivett retires.  Sad news.  I thought he was going to succeed Prem when Prem decided to retire

https://ca.finance.yahoo.com/news/fairfax-financial-holdings-limited-executive-220110417.html

Thatís worrying.

Petec, given he is going to continue to be involved with FFH in a small way i am not worried. Yes, it is unfortunate to lose a good person. My guess is Fairfax has a deep bench to pick a replacement from.

Itís not the loss of a good person. Itís the loss of the heir to the throne. Weird, perhaps, rather than worrying.


I haven't seen anyone say it yet, so I will say it:  "Did he jump or was he pushed?"

Frankly, in situations like this, my instinct would be that he was pushed.

SJ

Cigarbutt

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Re: Fairfax 2020
« Reply #34 on: February 14, 2020, 06:44:16 AM »
...
Re 2: I think we know for a fact that some subs are capacity constrained, and I donít know how easy it is to move capital between them. Does anyone?
Many ways to do it, including:

1) Use the dividend capacity already approved by regulators to send a divvy from the capital-rich subs to the holdco and then it's no trouble at all to shift if from the holdco to the capital-poor sub;
2) If the capital poor sub operates in the same jurisdiction as a capital-rich sub, merge them;
3) Float another holdco bond issue for $500m, and sprinkle the proceeds into the subs that require more capacity;

Maybe it's just a one-time freaky thing in Q4 that they were laying off premium on the reinsurers?  But, that's not exactly how I imagined the company attacking a hardening market.

SJ
That's a concern I had about the capital flexibility to grow in a hard market.
When you look at yr-end 2018 regulatory dividend capacity at the (re)insurance subs, only Allied World (685.6M) and OdysseyRe (329.7M) had significant capacity. Crum and Forsters had some dividend capacity but up to Q3, after an early upstream dividend, overall, net capital has flowed to the sub to 'support' growth. Up to Q3, OdysseyRe has paid 50M in dividends to the parent and Allied World has paid 126.4M to minority interests. I'm not sure how easy it would be for the parent to obtain dividends from Allied without some kind of permission or sharing to the 32.2% minority interest. If this hard market continues, in order to participate, FFH needs profitability from operations and investments which renders the premium growth (and its retention) conditional.
Even if their equity investments are not likely to be correlated with markets, the level of equity investments to total capital is high and unusual in its composition and that aspect has regulatory capital implications.

TwoCitiesCapital

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Re: Fairfax 2020
« Reply #35 on: February 14, 2020, 06:48:14 AM »
...
Re 2: I think we know for a fact that some subs are capacity constrained, and I donít know how easy it is to move capital between them. Does anyone?
Many ways to do it, including:

1) Use the dividend capacity already approved by regulators to send a divvy from the capital-rich subs to the holdco and then it's no trouble at all to shift if from the holdco to the capital-poor sub;
2) If the capital poor sub operates in the same jurisdiction as a capital-rich sub, merge them;
3) Float another holdco bond issue for $500m, and sprinkle the proceeds into the subs that require more capacity;

Maybe it's just a one-time freaky thing in Q4 that they were laying off premium on the reinsurers?  But, that's not exactly how I imagined the company attacking a hardening market.

SJ
That's a concern I had about the capital flexibility to grow in a hard market.
When you look at yr-end 2018 regulatory dividend capacity at the (re)insurance subs, only Allied World (685.6M) and OdysseyRe (329.7M) had significant capacity. Crum and Forsters had some dividend capacity but up to Q3, after an early upstream dividend, overall, net capital has flowed to the sub to 'support' growth. Up to Q3, OdysseyRe has paid 50M in dividends to the parent and Allied World has paid 126.4M to minority interests. I'm not sure how easy it would be for the parent to obtain dividends from Allied without some kind of permission or sharing to the 32.2% minority interest. If this hard market continues, in order to participate, FFH needs profitability from operations and investments which renders the premium growth (and its retention) conditional.
Even if their equity investments are not likely to be correlated with markets, the level of equity investments to total capital is high and unusual in its composition and that aspect has regulatory capital implications.

I haven't dug into the numbers in any depth yet to know how true this is -

 but it would be a massive slap in the face if all of these years we were told the company needed a fortress balance, that having tons of cash on hand was necessary, that hedging was necessary, all to be able to support subs in a hard market...only to get to the hard market and find out that they still can't do so?

Viking

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Re: Fairfax 2020
« Reply #36 on: February 14, 2020, 07:15:12 AM »
A couple of notes from the conference call:
- Annual report and Q4 info will be available March 6
- net written premiums grew at accelerating rate each quarter; sees trend continuing in 2020
- supporting growth of insurance subs top priority; this is because hard markets occur infrequently and only last a short period of time (a couple of years)
- share repurchases will be done with cash not needed to grow insurance subs
- in the non-insurance segment, TCook/Quess demerger resulted in $191 million impairment
- US runoff had $216 million loss due to asbestos strengthening; example of social inflation
- $600 million will be coming to FFH in Q1 when the Riverstone UK deal closes; after sale closes Riverstone UK will have opportunity (with OMERS) to grow business. Fairfax may take Riverstone public at some point.
- minority insurance partners buyout: 10% of Brit soon at $100 million (seems low?); Eurolife will be small amount; Allied agreement opens up mid year and Fairfax has 3-4 years to buy out minority partner
- Go Digit: the company recently raised 10% at $800 million valuation. The $300 million gain recognized by Fairfax was Go Digit convertible shares (owned via Quess) not the common stock owned by Fairfax (hope i got this right)
- BIAL sale was to third party investor; purchaser was not named
« Last Edit: February 14, 2020, 07:18:56 AM by Viking »

petec

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Re: Fairfax 2020
« Reply #37 on: February 14, 2020, 09:20:57 AM »

Petec,

I donít agree. Rivett has done a great job as a caretaker and lawyer. He is not in the league of Prem
And others at Markel and Berkshire...to take the stock where it should go. I called these earnings last year and a record year...no one cares. SNC Lavalin was a tap in in their backyard...SNC did not need the money but it was the kind of transaction that Buffett like operators make...Fairfax has been asleep. Blackberry is so undervalued it is attributable to Fairfax passive (do nothing) approach....hurting performance instead of helping. It is all great and everything to have a good reputation but as Buffett said about David Winters when he challenged Cokeís board....what has he done for his shareholders?
I am frustrated to say the least....if Prem is done give me a leader. The bones are there....

Yes - fair. Iím not saying Rivett was the right man. Iíve no view on that. Itís just optically odd when the presumed heir resigns.
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petec

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Re: Fairfax 2020
« Reply #38 on: February 14, 2020, 09:22:58 AM »
...
Re 2: I think we know for a fact that some subs are capacity constrained, and I donít know how easy it is to move capital between them. Does anyone?
Many ways to do it, including:

1) Use the dividend capacity already approved by regulators to send a divvy from the capital-rich subs to the holdco and then it's no trouble at all to shift if from the holdco to the capital-poor sub;
2) If the capital poor sub operates in the same jurisdiction as a capital-rich sub, merge them;
3) Float another holdco bond issue for $500m, and sprinkle the proceeds into the subs that require more capacity;

Maybe it's just a one-time freaky thing in Q4 that they were laying off premium on the reinsurers?  But, that's not exactly how I imagined the company attacking a hardening market.

SJ
That's a concern I had about the capital flexibility to grow in a hard market.
When you look at yr-end 2018 regulatory dividend capacity at the (re)insurance subs, only Allied World (685.6M) and OdysseyRe (329.7M) had significant capacity. Crum and Forsters had some dividend capacity but up to Q3, after an early upstream dividend, overall, net capital has flowed to the sub to 'support' growth. Up to Q3, OdysseyRe has paid 50M in dividends to the parent and Allied World has paid 126.4M to minority interests. I'm not sure how easy it would be for the parent to obtain dividends from Allied without some kind of permission or sharing to the 32.2% minority interest. If this hard market continues, in order to participate, FFH needs profitability from operations and investments which renders the premium growth (and its retention) conditional.
Even if their equity investments are not likely to be correlated with markets, the level of equity investments to total capital is high and unusual in its composition and that aspect has regulatory capital implications.

I haven't dug into the numbers in any depth yet to know how true this is -

 but it would be a massive slap in the face if all of these years we were told the company needed a fortress balance, that having tons of cash on hand was necessary, that hedging was necessary, all to be able to support subs in a hard market...only to get to the hard market and find out that they still can't do so?

They have capital, but as discussed by others itís at Odyssey and reinsurance isnít hardening as fast as primary. I do find it annoying that after years of implying that all subs have the capital to grow, we now discover they donít.
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Viking

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Re: Fairfax 2020
« Reply #39 on: February 14, 2020, 09:55:55 AM »
Here is a summary of Q4 results from one of the big Canadian banks:

ďOur view: The insurance part of the business is shifting into a higher gear with strong growth, improving margins and still solid reserves. Quarterly results were negatively impacted by some non-insurance items that are largely one-time in nature. We think valuation is among the most attractive in the P&C space at a discount to book value with rising earnings momentum.Ē