Txvestor

Very true. But all of this is only meaningful if they buy back in large quantities at these price levels. I feel confident they will but time will tell. The good news is that they have streams of cash flowing in right now. But equally some of it can evaporate with a weak share price Ie the TRS position. There could easily be a large cat event mopping up a lot of capital, interest rates could collapse weakening their interest income stream esp. now that they have shortened their average maturity duration, and geopolitics could impact their holdings quite heavily as they are more Internationally diversified than most. All of that said, they have the opportunity to deploy about 4B in buying out full ownership of their insurance subs, and even more stakes in their associates and outstanding minority stakes in consolidated companies. In addition other opportunities will surely come up. So share buybacks compete with those priorities for capital. I think they look at all these option sets when deciding to buy back shares. And if they aren't buying back a ton perhaps they are finding even better options for the capital is my assumption. Having said that 4-5% a year is a solid clip. as thinly as Fairfax trades, it may not be feasible to buy a lot more as well, like Berkshire Fairfax has a lot of forever holders. Adding it to the TSX could be an eventual catalyst for a melt up. $1600 v $2k a share means an extra 1% of the company for the same capital outlay on share buybacks as this year. I think we should all be happy for this continuing as long as possible. I think when they close out their TRS position is when they feel the share is approaching its intrinsic value.

@VikingGreat chart for giving a longer duration patient perspective on capital allocation. I wish it went just one year further back because that would have illustrated the impact on shares outstanding of the Allied world acquisition. I remember I considered the shares undervalued then and it was painful to have to issue shares for such a large acquisition. as I recollect, they were 21M or so shares outstanding before the acquisition. Initially, the $54 deal was structured for $10 in cash and the rest as Fairfax shares. Then Fairfax went to their old pension fund friends and managed to find an extra $18 per share in cash by the time of the deal closure. And by so doing managed to keep the dilution to about 5 million shares. If memory serves me correct they acquired 67% and the Olmers etc had 33% for their cash infusion. I remember Prem saying back then about the dilution and that they hope to buy those shares back in time. Now that we are back to the 21 million share count or so, we have come full circle. I know there is still a piece of allied world and other subs outstanding, but I think we have a clear path to full ownership. Prem is an admirer of Henry Singleton and has referenced his brilliance in capital allocation over his career at the helm of Teledyne. And with that and other acquisitions during this last cycle a wonderful insurance franchise is formed, one that is diversified, both geographically, by insurance lines, and with sufficient scale and quality that it provides Fairfax with a phenomenal insurance engine on which they are building a much larger multi engine investment vehicle.

It's not clear that it is, that's why I'm looking at them as two as separate things. They talk about it like it's an investment and they apparently do have a tax liability on the gains. So if they buy back shares now at $1500-1700 as they've been doing and then offload the TRS at $2300 for some other use they find for the cash, then it works to the benefit of the shareholders. For example they could decide to use that money to buy out the minority holdings in subs like Allied world etc. I think the fact that they didn't offload the TRS despite the share price going over 1800 means they see share prices as value even there.

Their TRS position hadn't matured sufficiently for them to harvest. Isn't that an indicator of where they think the price of the stock is? Their average buy in price for the year is $1581 for 542k shares of which most was since July and over 100k just this past month. and yet the shares trade for under these prices. Agree lots of crumbs.

Granted anything is possible, however, judging from MKL response to earnings, ie the weak sentiment going into earnings, and the reversal and ~10% climb over the past week, I think a similar thing is possible with Fairfax. Lets see.

What's crazy is that YTD they bought back ~542k shares at an average of ~$1580, with most of them since July, and yet today Mr Market gave everyone an opportunity to buy in at below that number. To mention nothing of the $3.5B or so of earnings during this time. That was an adequate invitation for me. Bought some today.

True that happened with Poseidon, but FFH is also fairly priced now, so could swap out of KW and into FFH. No telling where these relative prices would be at deal close.

If they didn't/couldn't do so with Blackberry during the meme stock craze(which hich actually lasted more like a couple of weeks) then there's next to no chance here. heck I got out of a residual Blackberry position for a tiny profit at around $18, it eventually topped out around 30. But position size is definitely a hindrance in such situations.

Anyone know if they would have a tax liability if they unwound their TRS position on their own shares by retiring them?

It's clearly a macro bet and one I wish they wouldn't indulge in given their track record in that area. Even if we entered a recession I think it's the rates on the short end of the curve that will collapse first. The long end will be lower, but calling 4.5 or whatever they sold at low seems premature to me. The odds of a spike to 6-7% seem remote to me. With the US $37.6T in debt and continuing to run a $2T+ annual deficit, even if the fundamentals support it, there is no guarantee we won't see the Fed doing rate suppression even to sub inflationary levels. Desperate governments do desperate things in the name of national emergency. I just prefer if they focussed on the underwriting, the investing and the share buybacks etc. But alas it's an aspect of their management approach we have to live with. It certainly discounts my valuation of them by a certain percentage.

What I liked most about this transaction is that they kept the P&C segments of Eurolife's insurance business. Additionally they got further into the Southeast Europe P&C market with a nice 45% stake of Eurolife's P&C business in Cyprus(which mostly came to them via the Hellenic bank acquisition), and they have the future option to buyout the rest. Now we don't know what the more recent underwriting margins/CRs were at the P&C insurance segment lately, nor what they are in Cyprus. But apparently P&C combined ratio was 60% at the time of Fairfax acquisition and Prem said 72% a few years later. So although smaller it contributed a much higher proportion of the profits. Life insurance underwriting is by definition a lot more of a tight affair. Margins are thin and underwriting a lot more predictable. Hence it is a lot more commoditized. I think 1.45X book value is a very good deal. Recently(last year) when NWLI (a generally conservatively managed Texas based life insurer) was sold, they sold for 0.73X book value. On the other hand, 1.45 times book value for a well managed P&C insurer with solid underwriting margins is a terrific deal. I would really be curious to see what the underwriting volume and margins turn out to be for this Greece/Cyprus P&C division in particular going forward. It could very well be that this segment alone is worth the ~$500M they would have put in altogether, ie 361M paid previously in 2016 and 2020 for 80% stake and the roughly $150M or so total valuation at which they are acquiring the Cypress P&C segment. PS: if I were to hazard a guess, I would say they combined P&C underwriting volume for both Greece and Cyprus would be in the €150-170M range with a 20+% underwriting margin. And eurobank reported a 13.2% growth in underwritten premiums for that division last year. Value that at whatever you think.

Viking, where did you find that they have a 102M exposure. I'm seeing 56M direct ownership and another 26M v convertibles.

LT cap gains 12.5%, not too punitive

Interest rates! Duration of bond portfolio does not matter to investment case? Last Q they reported about $625M of earnings from interest income. Of course it's material to the investment case and worthy of discussion.

Once again, I'm not the expert. They announced it fairly recently within the last Q or so. On the ground, I can sense a significant economic slowdown. If the economy enters a recession and long bond yields plummet, this will be a totally unforced error. Macro betting and occasional own goals seems to be a part of their DNA. I'm not even saying they should extend out too far out onto the yield curve. Matching their liabilities would be reasonable. 4yrs was perfect. In case of a recession it would factor in time for a recovery well ahead of the next presidential election cycle.

No Q there, Trump would and push come to shove the Fed would also. We saw that with not just QE but the long lingering loose money policy coming out of the GFC. However bear in mind insurance is a heavily regulated industry and there are requirements for insurers to have large portions of their funds in liquid fixed income instruments irrespective of interest rates. Hence they will stay sensitive to this market.

if treasury interest rates his 7% far less 8% or 9% I think we will have larger issues with US solvency. We are at 37T and climbing at 2T+ a year, 7% of that is 2.8T. We almost certainly will have rate suppression.

I agree with this. All the more surprising to me why they lowered their duration exposure to 2.1yrs recently. I know everyone said trust the management team and Bradstreet but their bets on macro have been mixed. And that one was a head scratcher. Interest rates didn't break upwards for 15-16yrs after the GFC. I doubt 10yrs are going to 1% but 2-3% sure; and that would lop off a good 700-800M annually from earnings.

While true using the 140yrs combined average. An intriguing part is when viewed in the last 15yrs or more or less post GFC, that's a combined 45 of those 140yrs and the average across all 3 has been a much more modest 8-10% number, still decent but not spectacular. I don't think that's attributable to any of them specifically but a number of other factors contributing to that. A couple I can think of are depressed yields on fixed income(compared to historic norms), a market that hasn't rewarded value based investing but more focussed on growth, some poor macro bets in Fairfax's case, and poor insurance growth at MKL etc. Either way my point is some of this maybe structural and I would not say 16-17% PA is likely over the next 20yrs. Although I would be thrilled if so were wrong.

So my Q to you is what would you do if it does well and in 5-6yrs that 46% becomes 70%? Thats a pleasant question that plagues many a Berkshire holder over the decades. Some did absolutely nothing and were handsomely rewarded and others kept taking off the table and seldom found anything close.

I'm right at around 20% in FRFHF with Fairfax India representing another 3% position. I actually invested about 12% over the years but the steep relative run up in the past 2yrs or so has got it up to 20%. I think I'm comfortable at this level but would consider either flipping my Fairfax India position into this if it nears full valuation or adding a bit more getting me up to 25% if there's a pullback. Beyond that it will have to be on the merits of the Fairfax management team. I admire some of you going much higher but I'd just sleep better more diversified.

@Viking Great analysis and perspective on accounting value v economic value. I think your analysis of the investment returns and their volatility smoothed out over 4yr time frames is very helpful to think about. I know Prem has tried in his own way to explain this by saying they would always prefer a lumpy 15% to a smooth 10%. Which is perhaps the same thing you are saying a lot more eloquently. Another aspect that bears recognition in this value creation machine Fairfax is building is its global diversification and growth of their insurance engine. Yes it’s cyclical(hard and soft cycles), yes it’s at times acquisition based(Allied world, Gulf etc) yes at times it’s even start up and innovation based(ICICI Lombard, GoDigit and Ki) but through it all, they have grown it significantly and profitably. If we look back at the same 4yr cycles, we would likely find that the underwritten premium growth as well as underwriting profitability has been quite a lot more consistent of late. I believe this to be an additional positive for overall investment/share price returns outside of your investment returns analysis. I think net written premiums has probably also grown at 7-8% PA averaged across cycles and if you averaged the CR (over say the recent decade) for any reasonable time frame 95% seems a good ballpark of where it lands. and we've tested this with Covid, the Cali wildfires and a few other Cats. to which they had exposure. Now, with their size and increasingly global footprint of underwritten premiums. That alone, aside from investments represents a significant value driver in my opinion. And if that growth ever slows it will represent a powerful source of equity capital to further augment the investment engine.

There is at least $7.5 billion initial investment there that has not been marked to market. And that's in addition to the 2.5 billion of unrealized gains they have reported. And to think the short seller thought at a share price of $1100 they were propping up valuations! They have done far better in the private equity space than in the public markets, generally speaking.

There were others too like Sandridge energy, APR energy etc. That was a particularly bad period as not only did the investments do poorly, their market hedges and deflation hedges also went poorly and they completely missed the tech run up. So the opportunity cost was on top of the economic loss. I think this particularly horrible period of investments which ended around trumps 1st term, that has anchored many investors anchored to a negative narrative on this investment.

I agree with this. However, if most of their purchase contracts for new build ships are also in Renmibi, wouldn't that offer some sort of inbuilt hedge against currency depreciation?