SafetyinNumbers

There doesn’t seem to be a post money valuation available. I think Ki should IPO at a very healthy multiple of premiums. 5x seems reasonable given the growth, profitability and potential for a 20% ROE.

Stand has $1b of insured value not $1b of premiums as far as I can tell.

Why do you think it’s a good comp?

Nice to be in good company. I added some FFH yesterday. On top of all of the positives that Viking listed, I expect reserve releases over the next few years will help the combined ratio beat expectations. This started last year and my theory is that releases will ramp as premium growth 4 years ago was a lot faster than it is now. I also like that Fairfax is built to buy the dip if there is a broader market sell off.

It would have but it’s consolidated and we know they sold for 1.45x BV so I think the gain is .45x book value.

Thanks for this Viking. It seems like OMERS investment may have been in shares with a preferred rate of return much like how the minority interests for Allied World and Odyssey Re are funded which really boosted returns.

Great point. The portfolio seems full of right tail options with high margin of safety. Plus 10-12% IRR ideas when levered 3:1 are 30%+ pre-tax ROE. It helps pull up the total ROE such that 15% seems much more than likely over a 5 year period. I think return expectations are pretty high and the types of investors that look at Fairfax use conservative assumptions so it’s easy to miss the opportunity.

I don’t think of it as a macro bet because that implies that matching duration is the default. I think they are just applying expected value investing to the fixed income portfolio. There is optionality in staying short duration especially if everyone else is long duration. The foregone interest income is the premium for the option and being in a strong capital position in order to grow fast in hard market is the payoff if long rates do move higher.

Have you calculated what the impact was on ROE based on the duration decisions? Do you also think they should own corporates while ignoring the spread?

Definitely but it’s the opposite situation here. Less risk by being shorter duration and padded reserves which should be released over time.

That’s just an accounting hit, it doesn’t have an impact on actual claims.

It’s interesting to see crypto being recycled into gold. Tether is taking the interest off of its stablecoin float and buying as much gold as China.

Plus it allows the insurance subsidiaries to buy private Indian companies with a lower capital charge.

My guess is that it’s just index arb. Shorting some as it got juiced by the very predictable index add. I’m not sure what the reporting rules are and when we will get an update on their position.

I don’t think they pay any capital gains tax because it’s held by a Mauritius entity.

They won’t take it private because the insurance companies get better capital treatment for owning a a Canadian listed public company than they would for holding private Indian companies. They also think in forever terms and taking advantage of Mr. Market is helpful to returns over time.

Once Anchorage is public that might help close the discount because ~80% of the holdings will be marked to market. Investors tend to put a bigger discount on the private holdings. It also has a chance to be valued fairly which means it can be used as a source of capital for buybacks. I still think FFH compounds intrinsic value at a higher rate given the inherent leverage but FIH is trading at a bigger discount to IV.

My FFH position is 10x my FIH position partially because passive has to own FFH while no one has to own FIH. Being in a benchmark gives a better chance at trading at fair value. I trade FIH for that reason while I don’t touch FFH (except to add). In any given year though FIH BVPS can go up a lot more than FFH given the potential BIAL IPO catalyst.

I suspect they will start increasing the mark on BIAL as the model DCF passes the mark. That will help BV momentum although Q3 looks tough because of the public marks had a rough quarter and the rupee weakened.

It’s a conundrum. The fees are lower because the marks are conservative but the realizable returns are also lower. It’s certainly a special situation since it’s easy to see BIAL is marked too low and there are trying to change that via IPO for the past 4 years. I appreciate the frustration but the underperformance is mostly the growing discount to intrinsic value which is not unique to Fairfax India given the market structure.

If intrinsic value is $35-40 and we started at $9.50 post IPO fees, is that a good enough return?

I think the discount rates and terminal growth rates have more to do with what they paid for the asset than anything else except they do assume fairly high inflation in their assumptions. Buying something and immediately writing it up doesn’t seem right either. Plus this way we get to enjoy lower fees.

I see the huge discount rates and low terminal growth rates as conservatism suggesting the marks are way too low which keeps management fees down.

When done right, both.

Practically, some of those other investments unlike BIAL are paying dividends and are being recycled which helps pay the bills while BIAL and others are incubated. I’m not sure how much overhead and distraction it is for management. I prefer the team be busy getting lots of reps and analyzing lots of businesses. I’m sure they have a much better feel for the economy this way than if they only owned a few positions.