Fairfax Financial Holdings Limited
Q2 2021 Earnings Call Transcript

Published: 30 Jul 2021

[Operator:]

Good morning, and welcome to Fairfax Second Quarter Results Conference Call. Your lines have been placed on a listen-only mode. After the presentation, we will conduct a question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Your host for today's call is Prem Watsa, with opening remarks from Mr. Derek Bulas. Mr. Bulas, please begin.

[Derek Bulas:]

Good morning, and welcome to our call to discuss Fairfax's 2021 second quarter results. This call may include forward-looking statements. Actual results may differ, perhaps materially from those contained in such forward-looking statements as a result of a variety of uncertainties and risk factors. The most foreseeable of which are set out under risk factors in our Base Shelf Prospectus, which has been filed with Canadian Securities Regulators and is available on SEDAR, and which now include the risk of adverse consequences to Fairfax's business, investments, and personnel, resulting from or related to the COVID-19 pandemic. Fairfax disclaims any intention or obligation to update or revise any forward-looking statements, except as required by applicable securities law.

[Prem Watsa:]

Thank you, Derek. Good morning, ladies and gentlemen. Welcome to Fairfax's 2021 second quarter conference call. I plan to give you some of the highlights and then pass the call to Peter Clarke, our Chief Operating Officer to comment on our insurance and reinsurance operations and Jen Allen our Chief Financial Officer to provide some additional financial details. Fairfax had an outstanding second quarter with net earnings of $1.2 billion or an earnings per share of $43.25 and gross premiums were up 27% with a combined ratio of 94.3%. Insurance and investments are working well together. Fairfax's book value per share in the first six months of 2021 increased by 15.2%, adjusted for the $10 per share common dividend paid in the first quarter to $541 per share. Our net earnings of $1.2 billion were a record for a quarter, but of course, they reflected significant unrealized gains. All of our major insurance companies generated combined ratios of less than 100%. More on this from Peter Clark. In the second quarter, operating income was strong at $398 million. Net gains on investments were $1.3 billion, with gains on net equity exposures of approximately $900 million and a $425 million gain on our preferred shares and digit insurance. The net gains on equities included unrealized gains on Blackberry, Stelco and BDT. Not included in the net gain numbers mark to market movements and unknown insurance investments in associates and certain consolidated investments, which we have described in our annual report. These investments increased in the second quarter by approximately $340 million. Any gains or losses in these securities will typically only be accounted for when sold. We have provided a table on our MD&A on page 73 that provides the unrealized gains and losses on these securities. As we mentioned at our annual meetings and in our annual reports and quarterly calls with IFRS accounting, where stocks and bonds are recorded at market and subject to mark to market gains or losses, quarterly and annual income will fluctuate and investment results will only make sense over the long term. As I've said previously, long term value investing has gone through a very difficult time for many years now. Valuations of value added stocks versus growth stocks, particularly technology have never been so extreme and the recent past exceeding even the extremes of the dotcom era in 2000. As the economy normalizes, we expect a reversion to the mean, with value oriented starts coming to the fore. After the Pfizer vaccine was announced last November, we started to see this take place. In June we increased our ownership interest in Singapore reinsurance from 28.2% and 94% for about $103 million to the completion of a public cash offer and commenced consolidating the assets liabilities and results of our operations of Singapore Re. We expect to acquire the remaining 6% and deal as the company from Singapore's from the Singapore Stock Exchange. Singapore Re is a general property and casualty insurer that underwrites business primarily in Southeast Asia, Singapore Re will join our Fairfax Asia operations, and will facilitate our continued expansion in the region.

[Peter Clarke:]

Thank you, Prem. Our companies continue to produce outstanding results. The 27% growth in gross written premium, over the second quarter of 2020 was one of the highest in our history, generating premiums of approximately $6 billion in the quarter. We also produce the combined ratio of 94% or 228 million of underwriting profit despite additional COVID-19 losses of $69 million and increase provisions on the first quarter us winter storms of $87 million. By comparison, in the second quarter of 2020, we produced an underwriting loss of $13 million, primarily due to higher COVID-19 losses of $308 million.

[Jen Allen:]

Thank you, Peter. The results of the second quarter of 2021 were very strong building on the momentum we achieved in the fourth quarter of 2020 and in the first quarter of 2021. We delivered net earnings attributed shareholders of Fairfax of just over $1.2 billion in the second quarter of 2021 and a book value per basic share at June 30, 2021 of $541, which represented growth in book value per share of 15.2% adjusted to include the $10 common share dividend paid in the first quarter of 2021. Turning to some highlights on our second quarter results. Peter provided detailed commentary on our insurance and reinsurance operations to all start with the results of our non-insurance companies. In the second quarter of 2021, our non-insurance consolidated companies reporting operating losses of $44 million compared to operating losses of $80 million in the second quarter of 2020. The second quarter of 2021 included Fairfax India's performance fee accrual of $43 million compared to nil in the second quarter of 2020. In the first six months of 2021, Fairfax India recorded a performance vehicle of approximately $100 million, with pretax earnings attributed to Fairfax shareholders, benefiting by about $71 million as Fairfax India 's non-controlling interest was allocated 72% of Fairfax India's expense. Excluding the impact of Fairfax India's performance fee, operating losses from our non-insurance consolidated companies decreased to a nominal loss of $1 million in the second quarter of 2020. That compares to $80 million in the second quarter of 2020 with a significant improvement noted in the restaurant and retail segment.

[Prem Watsa:]

Thank you, Jen, we now look forward to answering your questions, please give us your name and your company name and try to limit your questions to only one. So that's fair to all of the calls. Okay, Catherine, we're ready for the questions.

[Operator:]

The first question is, from Jeff Fenwick of Cormark Securities, your line is open.

[Jeff Fenwick:]

Good morning, everyone. Hard markets continue to be very beneficial for Fairfax. I know you're making the most of it. So just wanted to touch on that this morning, the first one was with Britt. There's been a period of time here where they've been reorienting the business, and we're starting to see some very good results there. And the benefit from there, the new key insurance platform, I noticed in your release there that you intend to sell 14% of Britt to owners in a transaction. Just wondering, you know, what's the decision to do that is to help bring in some additional capital that will continue the growth or why would that that decision made?

[Prem Watsa:]

Yes. So suggest the reason for that is just what we announced some time back. And we're going to conclude that with the RiverStone UK sale, and basically it gives us a lot of flexibility. We just thought we should have the flexibility. We have a very good relationship with we can buy that back soon. Peter, do you want to add to that?

[Peter Clarke:]

Yes, I think it just it all relates Jeff to the RiverStone UK transit transaction as OMERS had an investment in there. And now they're moving some of that those proceeds over to debrett . And like Prem said, to continue our long term relationship with OMERS, which has worked out extremely well.

[Jeff Fenwick:]

Okay, thank you. That's helpful. And then just one more perspective very significant step up in the reported premium growth in the quarter it had been doing well, but this quarter was up 30%, I believe, year-over-year in terms of net premium. So what sort of triggered that acceleration at chromas is just pushing on some new lines, and taking advantage of hard markets there or any color you could offer on that might be helpful?

[Prem Watsa:]

Sure, yes. I think the biggest thing that Chrome Forster was there, they started writing premium again in their travel book. The second quarter of 2020, essentially, their travel premium went to zero. And so now they're starting to write that business again, and it's starting to grow. So that was probably just the biggest factor in the sort of the significant growth and at Crum Forster.

[Operator:]

The next question is coming from Tom MacKinnon with BMO Capital.

[Tom MacKinnon:]

Yes, thanks very much. Good morning, everyone. With respect to digit, is it still the intention that you expect $1.4 billion unrealized gain in the third quarter? And then another potential $400 million when the final approval to increase foreign ownership comes in? Is that still the thinking?

[Prem Watsa:]

Tom, no, it's like $400 million, $425 million that's what Jen talked about in the second quarter, the $1.4 billion will come after the regulatory approval, and the approval by the government, it's more like the administrative rulings to go to 74% is already passed by legislation. But those two things have to be done. And that gets done in the third quarter, or the fourth quarters, you know, whenever it gets done, but the addition will be $1.4 billion.

[Tom MacKinnon:]

Okay. So the total addition will be $1.4 billion.

[Prem Watsa:]

Yes. So the other way to look at it is we got $1.6 billion, and in total of which $400 million, it's mark to market accounting rules. We don't like reporting it till it's actually happened. But accounting rules are very specific. You have to show the, because there's $200 million that came in, you have to show the, the increase in value of digit. And so that's what we did.

[Tom MacKinnon:]

Okay. So it was $1.8 billion sort of in total, and you booked $425 million of that now. So there's another $1.4 billion to come. Is that the way to think of that?

[Prem Watsa:]

That's the way to look at it. Yes.

[Tom MacKinnon:]

Okay, that's great. And just with respect to the two other transactions to close soon, RiverStone and Brit, it looked like you've booked some gain from the RiverStone transaction in the second quarter. Would we anticipate any sort of game when that closes in August of 2021? And then what about Brit as well? Is there a potential gain when that 14% sale transaction is completed? Thanks.

[Prem Watsa:]

Yes, the RiverStone transaction will close, but there's a portfolio of approximately $1.1 billion, $1.2 billion, Jen - $1.3 billion, that we will be buying back in the next two years at the end of next year, so a year and-a-half. And that's for our account and the fluctuations in that portfolio accrue to us. At the end of the first quarter, it was a small deficit. A the end of the second quarter, those are part of that number. You'll see that going up and down over the quarters. Still, we can take it any time up to the end of December 2022.

[Tom MacKinnon:]

And on Brit, is there a gain there?

[Prem Watsa:]

In Brit? No. Brit, there's no changes, Tom. It's fixed and we don't get any gain, we don't get any loss.

[Tom MacKinnon:]

Okay, thanks for that.

[Prem Watsa:]

Thank you, Tom. Our next question, Catherine?

[Operator:]

The next question is coming from Jaeme Gloyn, National Bank Financial. Your line is open.

[Jaeme Gloyn:]

Yes, thanks. Good morning.

[Prem Watsa:]

Hey, good morning, Jaeme.

[Jaeme Gloyn:]

Good. First question is on the on the reserve developments in the quarter and I guess for the first half of the year, kind of coming in the 1%-ish range. I'm seeing a little bit more favorable reserve development from other insurance companies. I'm just wondering if you can give us a little bit more detail as to what you're seeing on that front? If you can have any comments and maybe around Odyssey where we saw some unfavorable reserve development.

[Prem Watsa:]

Jaeme, we've got Peter here who's our Chief Operating Officer, and he used to be the Chief Actuary. So, Peter, your comment.

[Peter Clarke:]

Sure. I guess, Jaeme, I think what's distorting the numbers a little bit is we had approximately $60 million in development on COVID losses. So, that's sort of a one-off thing in our minds. And excluding the COVID losses, I think we had favorable development of around $90 million, which isn't that far off from the previous year. But generally speaking, it's the second half of the year where we do more thorough reserve reviews, specifically off the third quarter reserves and that's when we'll make more significant adjustments. Our reserves continue to be extremely strong and I think our companies are very conservative on the lost picks they're making on the current years. So, we would expect that we'll be building up some redundancy as we go through this strong pricing environment.

[Prem Watsa:]

A basic view, Jaeme, that we've said for many, many years now is that the past reserves can develop favorably or unfavorably and we just want it to be developing favorably. And so it's a risk in the property casualty business and we've had favorable development, I think for more than a decade now and perhaps even longer than that. But that's a very important requisite in the property casualty business.

[Jaeme Gloyn:]

Okay, understood. On those COVID loss development, can you describe what it was that was driving that? Is that anything related to BI ? A little bit more color on those COVID reserve developments at all?

[Prem Watsa:]

Sure thing. Peter?

[Peter Clarke:]

Yes. Really, it relates on our reinsurance business primarily at Allied and Odyssey. And it's a non-U.S., so it's in Europe where there are still uncertainty around what's covered, what's not covered. Is it one event, many events? So it's really just IBNR that's still being put up on the reinsurance books, mostly in Europe.

[Jaeme Gloyn:]

Okay. And related to BI, I guess?

[Peter Clarke:]

Related to BI and some of the BI issues, you might remember the UK ruling came out late last year. That's still filtering through the system.

[Jaeme Gloyn:]

Okay. Good. Understood. My second question or theme would be on the share buybacks, stock trading fairly low, the cash position is building and I saw some buybacks for Apple Treasury. Just can you update your comments and views and thoughts on share buybacks and as it relates to, I guess, the swap that's still in place?

[Prem Watsa:]

Yes. So, the swap, as Jen mentioned, we agree with you, the shares are undervalued. And in terms of buybacks, we always balance that as being financially sound. We've got a hard market, we're expanding, so we have to be cognizant of that. So, we take all that into account, Jaeme, and then react accordingly.

[Jaeme Gloyn:]

Okay. I'll re-queue.

[Prem Watsa:]

Thank you, Jaeme. Next question, Catherine?

[Operator:]

And the next question is coming from Jr. Rob , a private investor. Your line is open.

[Unidentified Analyst:]

Good morning. Congratulations on a wonderful quarter. For the total return swaps, what are the expiring?

[Prem Watsa:]

They can be extended. Peter, here. They don't expire on any time they we can continue to extend them as we like, Junior.

[Unidentified Analyst:]

Okay, thanks. And in terms of the monetization of the investment, are you guys looking to do any other big monetization in 2021? Or is that just ongoing progress process?

[Prem Watsa:]

It's ongoing, of course. These are things that are in the marketplace, so we can't talk about them till we actually have done it. But, as Jen mentioned, we continue the process.

[Unidentified Analyst:]

Okay, thanks a lot.

[Prem Watsa:]

Thank you, Junior. Next question, Catherine?

[Operator:]

And the next question is coming from Jack Grant of Water Securities . Your line is open.

[Unidentified Analyst:]

Good morning. Congratulations on a great job you've been doing. Prem, much like Berkshire Hathaway has run into BS about succession plans in the future, can you share anything on that from in terms of what the future holds when maybe you retire are available to run the show there for packs ?

[Prem Watsa:]

That's a very good question, Jack. It's a very important question and it's a question that we focus on, of course, all the time. Our directors focus on it, I focus on it because we're trying to build our company over the long term. So, if something happens to me today, the directors knows exactly what to do, 60% to the controlling company knows exactly what to do. So of course, very much focused on what you say. All our companies have succession plans right through the organization. And you might have seen over the years, but internal succession. Always be internal succession. It will be internal succession for each of our companies and it'll be in term succession for me. We always reviewed it and feel very comfortable that we've got the right people to take over. But good question, Jack. Thank you.

[Unidentified Analyst:]

Okay.

[Prem Watsa:]

Catherine, the next question, please?

[Operator:]

The next question is coming from Mikel Abasolo, Capital Management. Your line is open.

[Mikel Abasolo:]

Thank you very much for taking my questions, I have two if I may. But the first one is on the valuation of digit. If I understood correctly, you value as a combination of DCF and based on the transaction that the company is doing with the private equity firms, if I understand correctly, the revaluation of digit despite not being totally dependent on the private equity people has been performed following the investment by the private equity people. So, my question would be if that transaction finally doesn't come to fruition and regardless of any penalties from the investors or anything like that, would you revert back to the old valuation? You had a digit. That's my first one and the second one, if I may, has to do with the reconciliation on Page 73 of the report. Because I've looked at it and I see that for the non-insurance associates that are not listed, the reconciliation is not necessary because the dollar figures coincide. But that's not the case with the restaurants and other Fairfax India and Thomas Cook India. And if you could help me bridge that gap or understand why the figures are different, how to go from one to the other? Roughly that will be of incredible help. Thank you very much.

[Prem Watsa:]

Okay, thank you for both questions. The first one on digit. When $200 million comes out at that $3.5 billion market capitalization, very good investors, but a very significant market cap on a company that's growing significantly, but is running at - the last number we gave y'all was about $450 million of revenue. Going at a huge rate in India, India's itself growing, but the market cap is very significant. So, the $3.5 billion results in a $1.8 billion gain and the question is how much do you recognize at the second quarter? And how much do you recognize at the third when those two things happen that I talked to you about. And so Jen explained that using models, we figured it was $400 million, an odd $425 million. But that's just a judgment call. The $1.8 billion will be the number at the end of the day, but that's very subjective because it's only $200 million that's gone in on a $3.5 billion market cap. We think a digit is going to grow very significantly. We got a great guy, and Kamesh Goyal who is building the company, but there's no risk of that number being turned back if we don't get regulatory approval or whatever because these are done deals. That $200 million has been signed, sealed and delivered. So, there's no risk that they can back out. It's the only regulatory approval now and the 74% going through. On your second question, why don't I pass it to Jen?

[Jennifer Allen:]

Yes. And I think if you wanted additional details, you're more than welcome to call after, but high-level, I think the easiest answer to explain it would be your biggest driver is for Fairfax India's portfolio on note six where we show the total carrying value versus fair value. You have Bangalore Airport in there, which is the way the accounting standard works is that Fairfax India's carrying value and Fairfax only has a 28% equity interest in Fairfax India. So, when you actually look to the back of Page 73, we're then taking only our 28% interest. So, that would be your largest disconnect on how we look at it. Because note six is on like a gross-up basis and then in the back is what our attributable book value per share would be accretive for Fairfax India. But if you want more details, I can walk you through it offline.

[Prem Watsa:]

And Jen, we talked about that in our annual report and we explained all of that. Peter?

[Peter Clarke:]

That might be a good place to look as well. On Page 10 of the annual report, we have that similar table and we provided the reconciliation.

[Prem Watsa:]

Thank you very much for your question. Catherine. Next question, please?

[Mikel Abasolo:]

It's Page 10. Right? Yes.

[Prem Watsa:]

Yes, Page 10. Thank you.

[Operator:]

The next question is coming from Alan Parsow, Elkhorn Partners. Your line is open.

[Alan Parsow:]

Hey, Prem. Great quarter.

[Prem Watsa:]

Good morning, Alan.

[Alan Parsow:]

I think I heard this right. I'm on a trip, so, I'm on a mobile, but I think I heard when you talked about the unrealized in the equity portfolio, you mentioned in the second quarter that there were significant gains in BlackBerry and unrealized in both the debentures and the common. Does that infer - which I think it does, but I don't know - does that infer that none of the BlackBerry was sold in the second quarter?

[Prem Watsa:]

Yes, that's exactly right, Alan. none of the BlackBerry was sold because it's all unrealized. Yes.

[Alan Parsow:]

Okay. So up to this point, the company hasn't been able to take advantage of the MEM or the other significant or outsized gains - fluctuations, let's just say?

[Prem Watsa:]

I think that's right. We haven't been able to take advantage of it. We're insiders, we've got restrictions and we talked about that last quarter, too. And, of course, we are very supportive of John Chen and all the good things that he's doing with, with BlackBerry.

[Alan Parsow:]

Right. I thought, if I heard you correctly after the first quarter call, that any restriction disappeared? Or is this after the first quarter? Or does that mean that this company is permanently on the restriction list of...

[Prem Watsa:]

That's a good question, Alan. And no, it's not permanently, but when you're on the board and we've got the significant interest that we have that are around times quiet periods and restrictions that apply to significant shareholders. But you're not permanently restricted. No.

[Alan Parsow:]

Okay, fine. Thank you.

[Prem Watsa:]

Thank you very much, Alan. Can we have the next question, Catherine?

[Operator:]

Yes. And the next question is coming from Jaeme Gloyn from National Bank Financial. Your line is open.

[Prem Watsa:]

Hey, Jaeme.

[Jaeme Gloyn:]

Thanks. I was just going to follow up on the performance of non-insurance subs. Looks like it's a little bit better Q2 and hoping you can give us some additional color and commentary on how the non-insurance subs, retail restaurant, Thomas Cook are performing early into Q3? And particular in Canada, where we're much more open this month than we have been...

[Prem Watsa:]

Yes. Jaeme, the restaurants, you'll see their results. Their results haven't come out, I think for Recipe. They will come out and they're doing much better. But of course, Ontario's just opened for indoor dining and for the most of the year, the restaurants had a very difficult time in terms of being closed. If you see what's happened in the United States, once restaurants were open, they've gone through 2019 levels. So, we expect the restaurants will bounce back significantly. Fairfax India had Thomas Cook. This business went to zero, no travel to speak of. So, that was difficult. This pandemic for many of our investments was difficult. I'm exaggerating to make the point, but that's all in the past. It's on its way back and these are good companies, good management and we see over the long term good returns from them.

[Jaeme Gloyn:]

Yes, I was also just going to ask in terms of the revenue side. It looks like it's going to be good. Do you have any comments on the labor side of it or expense side of it on this as you're reopening? Are we going to see that revenue uptick float to the bottom line in those?

[Prem Watsa:]

Yes, Jaeme. All of those things, including the restaurants, we think the revenues will be through 2019 levels once we back up. And unfortunately, lots of smaller restaurants have gone out of business. And so, if you want to go out dining, the big restaurant chains are where the action is going to be and our Recipe expects in the years to come to do well.

[Jaeme Gloyn:]

Okay, thanks.

[Prem Watsa:]

Thank you, Jaeme. Any more questions, Catherine?

[Operator:]

We have no further questions at this time.

[Prem Watsa:]

Okay, there are no further question. Thank you all for joining us on this call. And thank you, Catherine for hosting it. Thank you, till our next call. Thank you very much.

[Operator:]

This will conclude today's conference. All parties may disconnect at this time.