petec

Sure - we are certainly not at the point of speculative excess yet. But the psychological pendulum has swung a long way from the pessimistic extremes. Maybe it's halfway through its swing. And it's closer to the point where you need things to go right to win, rather than things just not to go wrong. All I think Parsad and I are saying is that this is not as easy a buy as it was at the lows, and a lot more is in the price, and as it continues to rise, we should all get more cautious not more excited.

Does FFH publish under GAAP anywhere? I assume not...

Agreed.

Hi all. Sorry for the open question but does anyone have a sense of this? Are the oil sands companies staring into a black capex hole, or is this project likely to be economic via some combination of carbon and tax credits? Many thanks.

Ha - I thought that might provoke a reaction. Of course it isn't. But the mood on the board has certainly shifted (and in a pro-cyclical way). A few years back I seem to remember lots of people questioning whether book value was accurate, even, let alone whether FFH should trade at 1x when it was run by a nepotistic ego who'd lost his edge. Today we are completely ignoring the fact that book value just got a meaningless boost from IFRS17 and think it's run by a genius. I am exaggerating, of course, but hopefully you see what I am getting at.

Exactly. Sorry. My point is that when rates are low, capital goes hunting returns and some of it lands in insurance. When rates are higher, less capital goes into insurance, so both interest income AND combined ratios improve for FFH. Amen! But at root you're saying this thing can earn $400/share in perpetuity (to hit a 10% return from $4000). I'll take the under! Agreed. I stopped trying to figure out odds or timing in any precise way years ago. I have a gut feeling that Viking will be roughly right on fwd 3y earnings. But the chances of the flywheel going the other way well above 0. That's all I am saying. Absolutely. I love the equity portfolio. Yes - this is a really good point and I appreciated SiN's longer post on this topic above. Separately, having been one of the stauncher (perhaps even dogmatic) defenders of FFH and its management during the dog years, it rather amuses me to be trying to inject some calm into the froth! How things change. It's amazing (to me) to think that I have held this stock continuously since 2008 and actually done ok in it despite the many years of darkness.

I am not *assuming* anything - that's not how I invest. I just try to think through all the reasonably plausible scenarios to get a sense of the risks (in both directions). I *very largely* agree with your analysis, which is why Fairfax is my largest position. I also agree that rising long bond yields are a potential boon. But I can also envision a scenario in which inflation continues falling, rates settle back a bit lower, more capital enters the industry, Fairfax cedes and operating earnings fall. Or a recession, in which case all of those things might be combined with reduced demand and rising claims. Much more importantly for me, if you're valuing it on PE, you're basically making an assumption about *terminal* earnings power, not just earnings power over the next 3 years. This is a critical point. I don't really disagree with your 3-year assessment as being the most probable pathway from here. But I am not so convinced that this level of earnings can be sustained from 2026 until eternity, which is what a PE valuation effectively calls for. That's why I value this on 2-3y forward BV.

I would put the probability of this at about 1%, but only because nothing really has a 0% probability. But if you want my stock for $4000 you're welcome

I should have read this before replying - nailed it I think! The one query I have is how much CR and rates are related. It may be that 0% rates forces capital into the industry and CR's down, and 5% rates have the opposite effect. In other words I suspect the sources of operating earnings are highly correlated, and if you assume rates are now higher for longer, all insurance companies will earn more. But equally, the cost of capital is by definition higher in that scenario, and the net impact on stock price makes my head hurt.

Agree, but nonetheless I think these will turn out to be good deals.

Early morning my side of the Atlantic! Sorry it took me a while to come back to this. That's entirely fair, and yes Prem & team positioned themselves for a reversion to normal beautifully. But (being pedantic) you said the increased earnings power is simply down to their decisions, and it absolutely isn't, IMHO. It's definitely partly weighting. I went into covid owning a lot of this and had the great good fortune to add significantly at about $250 IIRC, so FFH has definitely grown as a % of my portfolio. But it's also value. If we agree FFH's operating earnings are in large part rate-dependant, then we're straying into territory where I don't trust my opinions, and I don't assume that this level of earnings is sustainable. Instead I tend to value it at 1x or 1.2x 2-3y forward BV, including the excess of carrying over fair and a bump when the digit deal finally closes (and I don't penalise them for IFRS17, which arguably we should). That still gets you a VERY nice return from here. But I can find other things with a similar outlook so why not diversify the risks? To be clear though, I've probably taken 5% of my peak position off the table - i.e. not much. It is still my biggest holding by some distance. I expect to own it permanently because I have great respect for management, but the size will vary with valuation.

Viking your work is usually excellent but this statement is wrong. Fairfax have absolutely done excellent work - I have argued this for a long time, and actually think it goes back decades, notwithstanding clear mistakes regarding the big short. However, what's really driven the increase in operating earnings is the big shift in the macro backdrop - covid stimulus and then rising rates helped (in rough order) Atlas, then the broader economy, float income, and underwriting profits (because CRs are directly linked to interest rates, which control the amount of capital flowing into the industry). Eurobank's recovery is not entirely unrelated to this either. Don't get me wrong: Fairfax's management made some great decisions in the down market to grow by acquisition (not writing more policy) and put themselves in a position to write record amounts of business and generate record amounts of float in the up market. They got roundly criticised for some of those decisions on this board (the Brit and Allied deals were evidence of Prem's towering ego, not his ability to make different decisions at different points in the cycle). I agree with almost every example you've given of good decisions on their part. But the fact is that if rates were still at 2019 levels, which they might well have been without covid, Fairfax's operating earnings wouldn't be at this level. That said, I do think Fairfax's next 2-3 years look strong, and by then they will be so large in float terms that operating earnings will be far higher than historic levels regardless of rates. And I think the stock looks fairly cheap on that basis. It's my largest holding, but I trim on spikes these days.

I mean, it's not a high bar! Germany and France forced pro-market reforms on Greece that they'd never do at home. They're working. Thanks for the posts.

I've idly tracked TCIL ever since FFH bought it, including talking to the HWIC Asia team about it some years ago. It always seemed a highly intuitive investment to me - good going in price, great way to benefit from rising per capita GDP in India, sensible-sounding tuck in deals - and yet it never really seemed to work. I thought it was going to grow fast and gush cash, but I don't think it has (even allowing for covid). Similar to Quantum Advisors, if anyone remembers that - it was meant to become the Vanguard of India but is never mentioned now. Can't win them all!

I'd be furious if they "indulge anew in shorting with uncapped exposure", but I think it is important to note that they "may use options with a potential finite loss to hedge our equity exposure". I have always felt they made two mistakes with the shorts: 1) the reasoning was wrong. I defended it at the time and was also wrong. Hedging an unexpensive market because you expect a depression is flat out dumb, especially in a fiat regime when the printer is going "whirr". 2) they did it the wrong way, with uncapped downside. Retaining the ability to buy out of the money puts with finite downside is smart and I am glad they have. I'd be happy if they did this with individual stocks occasionally too, but that's less important than being able to hedge the entire portfolio sometimes.

Ha ha - it's very apt!

I've often wondered what the plan is with this. An exit? Dividends? Fold it into FIH?

Thank you all for your replies and @nwoodman I'm delighted if anything I said was helpful. FWIW FFH is my biggest single position (16%) and I think it is good value here. It was just even better value $250 and $500 ago!

Serious question. Why are you all buying FFH now? What are you seeing that you couldn't see at lower prices 1, 2, and 3 years ago? I'm well aware of the bull case having followed it in detail for years, but the value doesn't see as strong here as it has been for several years. What am I missing? Is it just that the probability of the bull case developing is higher?

They've been very clear that they won't change how they think about reserving as a result of IFRS17. I would assume they won't let it change how they think about the investing side either. They've always been about making actual money in the long term rather than worrying about accounting book value in the short term. I very much doubt that's changed and I doubt IFRS17 drove the 1q duration decision. I do think IFRS17 will slowly change the way the market think about the stock, though.

Yes that's fair. I'd have to check my notes but from memory the financing is split between the secured facility (which is floating rate but has the huge advantage that they can move ships in and out of it) and individual ship financing which I THINK is mostly fixed/hedged. My big concern with it was always that leases aren't inflation-linked. There is opex passthrough but the "financing" part of the leases are fixed. So yes, there is a risk they get squeezed. (Obviously the ship values do rise with inflation less depreciation, so there is inflation linkage over time, but that's cold comfort when you have leased a ship on a 10y contract and rates are rising.) What really astonished me about the financings was the loan to value, which was close to 100% in some cases. Obviously that works both ways but there is headroom for a significant ROE!

Nice summary. I would add: Fairfax's original investment was also deeply countercyclical and at objectively good value if the balance sheet could be sorted out, which Fairfax helped with. It wasn't just a bet on the jockey, although it was sold that way. Atlas gave up peak profits in favour of long term contracts and newbuild orders, financed on phenomenal terms and entered into before the shipyards got full. It won the upcycle but this will only become apparent in the downcycle. P

They've structured a number of deals this way which I think is quite smart.

Have you elaborated on this thesis anywhere? I can't find a thread...

Not me. I can own Berkshire and Markel myself. I far prefer Fairfax to do something different and hope they continue.