SafetyinNumbers

They are at US$980. The increase in interest rates means a structural increase in ROE vs the last 20 years. Should be interesting what the narratives will be when the multiple expands and how quickly holders will jump ship. There will surely be lots of drawdowns that investors will want to avoid.

I think part of is it they miss the IFRS 17 impact on earnings because they model underwriting income on the stated combined ratio while the IFRS adjusted combined ratio has been lower. Viking has something in line 4 of his model above. When I look at RBC’s model, they have the combined ratio down but also have underwriting income down year over year. When I was in equity research we would say that’s not internally consistent. For 2024, the growth in investment income is underestimated based on current rates, associates income is held flat from 2022 despite H123 at ~60% of 2022 already and gains expected on the equity portfolio are very small. He’s at $130/sh for 2024 and he might be right but the odds seem low.

I’m more focused on the weight in the S&P/TSX Composite. While it’s counterintuitive to most value investors, the higher a stock in a major benchmark goes, the higher it will go as long as returns are consistent. For Fairfax, that seems highly probable given the proportion of income coming from investment and associates income. Fairfax has almost doubled its weight in the index since YE2020 to 95bps. My understanding is that active institutional managers benchmarked to the Composite will likely reconsider Fairfax again when it crosses 100bps. That seems likely to happen in the next month as Fairfax reports Q323. My guess is that book value is closer to $875 which will drag the shares higher as our fellow shareholders will hopefully not want to sell below book. If we go through 100bps, that I think can lead to multiple expansion finally which along with strong earnings will encourage analysts to raise their estimates and target multiples. The next step will be getting bigger than Intact Financial which is heavily owned by those benchmarked to the Composite. It sits at ~125bps. A lot of managers arbitrarily decide they only want exposure to one P&C and there is no reason to sell IFC except it has really underperformed Fairfax recently.

It doesn’t matter if you don’t think he’s credible. His estimates influence quants and those who use quant screens (most active management) such that they can’t even consider Fairfax. In the long run, it doesn’t matter as long as Fairfax keeps executing which seems highly probable given the sources of earnings but it’s part of the reason why the market still hasn’t valued Fairfax in line with peers. It also looks like he just cut his earnings estimates again.

I don’t think he speaks to any actual investors in these names or risks any of his own capital so I wouldn’t expect the analysis to be any good but it doesn’t explain why his earnings estimates for Fairfax drop so precipitously while staying kind of flat for the other comps. Also, recall, he doesn’t set the target prices, a Morningstar computer does that based on his financial forecasts and moat assessment.

Does it have the chance of being a hot IPO? I think stand alone IOT and Cybersecurity businesses both trade at high P/S multiples relative to where Blackberry trades. Maybe rebranding and making it a pure play will get the new ticker a big audience. M&A would also be easier for both segments once they have price discovery. It makes sense to do a marketed offering to get the multiple. It will presumably be a tight float so has meme potential given Blackberry’s iconic brand. I don’t know how to value these businesses so won’t participate but it does seem like it has event driven potential for someone with the right skill set. Could get interesting for Fairfax too.

Found it. Morningstar-MKL9.23.pdf

The style drift is getting a macro call wrong that shareholders were big fans of at the time they were placed.

I think the large transition from value investing to passive and quants has amplified the desire for a smooth 10% to a lumpy 15%. Social value is also a much more relevant factor and BRK/MKL enjoy very loyal shareholder basis. They never think about selling. Meanwhile, almost every Fairfax bull I talk to is waiting anxiously for Prem to make a mistake so they can sell before experiencing a drawdown.

I agree with your take @MMM20. The float to market cap ratio locks in so much ROE vs the comps. Fairfax’s equity portfolio is also a lot cheaper on traditional measures of value so arguably adds relatively high long term built in ROE. Plus they have a disproportionate amount of earnings to redeploy in safe acquisitions like buying the rest of Allied World, Brit and Odyssey over the next few years which will just makes them all the more durable. I’m betting the index huggers chasing the stock will start using the increased durability as a narrative for why they are buying stock at 1.5x book value. It will still be the right thing to do as it might even get to 3x like it did in 1998. For that to happen, the ROE has to be elevated for a few years in a row. We are off to a good start in 2023. The low risk income off the float, hard insurance market, high level of associates income, Digit/BIAL IPOs make it seem likely the ROE can stay strong for a few years which is why I continue to think Fairfax is a fat pitch. @Viking’s earnings forecast could be conservative. Value investors rightly focus on the margin of safety but I think most investors actually interpret that as avoiding drawdowns. While a lot of us here spend a lot of time thinking about Fairfax almost no one else does. It’s still well under owned by Canadian asset managers despite its weight in the S&P/TSX Composite at ~89bps at Q323. Today, it outperformed by almost another 5%. 100 bps is within spitting distance but passing Intact which is around 125bps might be the bigger deal as PMs likely only want to own one P&C insurer even though Fairfax is special because of its equity portfolio and capital allocation strategy. Ironically, the higher it goes, the higher it’s likely to go which means most value investors will likely sell too early. Earnings estimates still show declining earnings for the next few years mostly because expectations are for lower interest rates and low investment returns on equity portfolio. These analysts from what I can tell haven’t actually taken the time to appreciate how cheap, for example, Eurobank might be and how big a chunk of the portfolio it is. While it may be conservative to assume low single digit returns on the equity portfolio, it doesn’t mean it’s a probable forecast. Quants and active manager that rely on quants (i.e. almost every asset manager) can’t even see Fairfax because of the declining earnings forecasts and high variability of historical results. I think there is a good chance analysts will start increasing their estimates to something more realistic if Fairfax keeps executing which again should be easier given the composition of earnings is more predictable. That will finally get the quants thinking about Fairfax. Of course, anything can happen and nothing is guaranteed in markets. It’s always a bet and we mostly all see the odds differently.

Shouldn’t be much. I think the 3 year was up ~20bps last quarter. There should be some offset from IFRS 17 as the discount rate is up. That should also help the actual combined ratio (vs the reported combined ratio which is not discounted).

IIFL Finance also looks cheaper vs consensus estimates. It’s interesting they sold some recently to help fund the additional BIAL purchase. If they also use it for buybacks, arguably, they buy IIFL Finance back at a big discount too! From sharing the idea with others it seems like the biggest reason I hear from investors for not owning Fairfax India is the fee structure. In reality, cheap NAV plays without known catalysts to close the discount seem like they will permanently trade cheap (see E-L Financial). The real reasons are no analyst coverage, low liquidity, unpredictable earnings and not being in a relevant benchmark. There is just too much competition from liquid cheap stocks with catalysts i.e. energy, uranium etc and the fee structure is a narrative to explain the discount for not wanting to own stock since markets are supposed to be efficient. What do you all think?

I think you are referring to algorithmic quant trading which is an absolute return strategy. I’m referring to quant-based investing which is a relative return strategy with the relevant benchmark being the S&P/TSX composite for Fairfax. It’s also called factor-based investing. You are correct that liquidity is important and only a few quants will go into smaller names but they do exist. Liquidity is probably one of the reasons Fairfax trades cheaper than others. A direct reason how liquidity impacts the share price is not having listed options. Just having listed options means dealers would have to have inventory which would increase the share price. Ultimately, it’s just supply and demand (i.e. a voting machine) in the short term.

It’s already in the index (32nd biggest component). Passive and quants have taken so much market share from active managers that active managers are forced to act like passive and quants. They need to buy whatever is getting more relevant to keep up and sell whatever is underperforming. They need to buy what quants buy to keep up with their performance so they don’t lose market share. Ultimately, when Fairfax is added to the S&P/TSX 60, passive will have to buy an additional ~4% of the float but that will take a long time as the index is already dominated by financials. What makes you think quants aren’t active in Canada?

I’m in your camp @MMM20. We know the mechanism for buyers to pay higher and higher multiples comes from quants and index huggers. Over time, instead of projecting declining earnings estimates every year as they do now, analysts will project growing earnings which will invite more quants in. With the persistent growth in book value, Fairfax’s weight in the S&P/TSX composite will go over 100bps (it’s 90bps now) probably in the next 6-12 months. The cost of being underweight will hurt more and more. The hurdle to buy Fairfax at book value should be low but most actively managed funds can’t even look at it because it doesn’t pass the quant screens (see Morningstar’s analysis for example). It will be fun to watch the narratives on Fairfax adjust to accommodate the higher multiples that are paid over time. Clearly, I’m taking the under on @Parsad‘s 7-10 year estimate for the shares getting to C$3300.

What would the over/under be on when we trade there?

The automatic plan is new, I think.

Net additional cost €10-15m doesn’t hurt too badly. Do you really think the share price reacted to that or just the general market jitters?

I think the long term analysis is complicated. The extra capital from avoided losses this season can be invested at high returns. If pricing gets worse and premium growth declines that would free up even more capital for potential equity investments. I think in the short term, the stock likely benefits if we avoid any meaningful cat losses in Q3. Hurricane season makes holders antsy and buyers reluctant. Between this hurricane season and next, I think we likely get some multiple expansion.

Still not out of the woods on hurricane season but Q3 consensus EPS is only ~US$25 and that seems very beatable without large cat losses in the quarter. I think it’s why the stock made new highs this week. Presumably FFH is trading below book value again based on real time book value.

This seems like great news for India and Indian issuers. Passive capital will force active managers benchmarked to the index to also buy Indian bonds. Seems positive for the Rupee and credit spreads.

Bloomberg is reporting Stelco is considering a bid for US Steel. I assume the partner is not Fairfax but perhaps an international steel company. Others might assume otherwise and sell their shares in fear of a drawdown. I assume if they go ahead, it’s because it’s very accretive. https://financialpost.com/pmn/business-pmn/canadas-stelco-holdings-is-said-to-weigh-bid-for-us-steel

I assume that journalists were going to break the story anyway and after what happened with Chinese election interference, I’m not sure they had much choice but to disclose it. The companies that are applying for approvals are Indian so it might be a stretch to assume it’s going to slow approvals. They were pretty darn slow to begin with.

I think that’s the right way to interpret the data but I’m not an insurance expert. Using stock at 1.3x book value to get scale in insurance is part of the Singleton playbook that investors generally don’t focus on but it’s part of why the stock got so depressed (a lot more shares for investors to absorb) and why the opportunity is so good now.