petec

Is there any evidence that they will sell it? I see this as a move to simplify and make the value obvious, but I don't see why they'd sell. It's a good business with a huge growth runway and they've been doing a lot of tuck-ins. I think this is a long term holding. Might be wrong.

The buyback history might also suggest it will be opportunistic. There is a very high chance of a material market selloff in the timeframe we are discussing (5-10y). That's when I'd expect to see material activity. Otherwise it will be an FCF-driven slow burn.

Agreed, but he hasn't made a commitment and they are value monkeys at heart. My guess is they will be very disciplined. I think of it more as a floor, like the Buffet 1.2x BV floor. That said he clearly thinks IV is well above book so it will be interesting to see where they stop!

I think the structure of the Brit deal with OMERS is: - They don't have to pay a dividend but if they do it all goes to OMERS up to a hurdle, and above that it goes to FFH holdco. - They can buy OMERS out over several years at cost plus an incentive which I seem to remember being about 7% a year. So if the BV compounds at >7% the p/bv falls and if not, it rises. AW has clearly had a rotten start to that but I suspect we are a few years from them buying the stub and it's got a great record of BV growth so time is on their side.

I think you're right and the same applies AWH eventually, I would think.

I think growler must mean something different in the US than it does here!

He's referenced Singleton and Teledyne before and in the letter. Teledyne issued to acquire for years and then turned the ship and bought back for years. The buyback is a long term thing. They can't put too much to work too fast - the stock isn't liquid enough, unless they do an SIB, but then they'd have to pay a premium - and they've never said they wanted to. Expect the share count to be much lower in 10 years but not necessarily in 10 months.

I think the culture is phenomenally valuable. It's very clear to me Fairfax attracts and retains superb people and is increasingly a company that people want to sell to. Changing that would be madness. But that's not the same as saying power should be heritable. Power should go to the person best able to protect the culture. I don't think I'd expect an operating profit (excl gains) in a big cat year, especially when interest rates are so low. I actually thought the underwriting results were phenomenal - if you look at the subsids FFH where FFH controlled the underwriting, i.e. excl AWH, FFH would have made an operating profit in a massive CAT year for the industry. That's extraordinary and not what I would have expected at all. AWH was awful but Prem was clear that they don't expect AWH's results to differ so substantially from FFH's going forward, which is a way of saying they'll influence the underwriting. The idea that one bad hurricane season somehow makes AWH - a company with a good history - a bad deal seems nuts to me. I suspect it'll be a home run. Could be wrong. As for the investing, far better that they focus on putting together a series of asymmetric outcome 1s and 2s than try to do something big. I love the details on those.

I'm fairly sure that as it is a >20% holding Fairfax would equity account it, reporting their share of Quess's net income and book value and ignoring the market price. That's why equity accounted associates contribute to the $1.2bn of unrealised gains that aren't in the book value currently. Quess would just add to that, I think. SJ - largely agree with you - not too bothered about Ben's $50m mandate but the appointment of a second child to the board worries me and the suggestion that it is done to defend the culture without any detail as to why she is the right person to defend the culture is insulting both to our collective intelligence as shareholders and, frankly, to the significant number of very bright people at FFH who are more deserving of that seat and whose experience of the culture is far greater. Very annoying. And if they are going into Singleton-style buyback mode as they say, at some point in the next decade those multivoters will have outright control.

+1 Very impressive.

...and even that part is fully rate-hedged, according to this letter.

Won't they equity account it and therefore still not record it in BV?

True, although the market clearly doesn't. AXA's market cap fell by about the market cap of XL when the deal was announced!

Thanks! I'd make the same guess. Here's hoping.

I'm sure I am about to get schooled but why are you certain?

On a tangent, Kraft should take a good look at BRFS.

13% and rising. For the family - higher for me personally.

If they're going to reduce the share count by 87% I'll happily wait 15 years!

OK, thanks. I read at least one of those...can't remember which!

Which letter? I can't find this in the 4a17 one... I think the buyback plan is a long term change of strategy (from issuing to acquire to buying back) rather than an imminent promise.

Not with Jeremy Corbyn waiting in the wings. I like the LNG/GHE/DIS ideas.

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.

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 ;)

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.

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.