SafetyinNumbers

Chance of a bump? I like how they are adding leverage at Recipe after paying down debt for 3 years. Maybe they even take a dividend to relever it to 4x debt to EBITDA. All very accretive.

I think most executives are actually incentivized to have higher short term profits so the incentives are usually against the best interest of long term shareholders but arguably to the benefit of short term shareholders. I think it’s probably pretty easy to “pad” reserves in a hard market because the market is usually hard for a fundamental reason like high claims. It’s a very complicated process but I think about it as FFH trying to lock in business at the same margin in a soft or hard market. Effectively they assume markets are efficient and that’s probably easy to clear with auditors and regulators.

Great analysis Viking. I think the reserve releases you pointed out are worth highlighting. Historically, that number has a lot of momentum and premiums were growing fast 4 years ago. It can be a real tailwind to underwriting earnings but delayed one quarter by the unusually high cat losses.

The insider information is only valuable if one knows the trade. I was just curious if there was consensus on that. If there is selling, what could be some of the beneficiaries? What’s the right multiple for BRK i.e. when is it a buy again?

What’s the trade?

You can check yourself but in previous SIB circulars ELF has said they are not a PFIC. That makes sense since they control Empire Life.

To be fair to them, they are playing a different game and it’s worked for a long time. Quant investing is a big data exercise and is not about picking the best idiosyncratic stocks. It does hurt FFH’s valuation as most large asset managers and retail brokers use quant screens so they can’t own FFH and ultimately stock prices are just supply vs demand. The beauty is FFH is taking advantage and scooping up stock.

Morningstar’s analysis shows FFH doesn’t screen well for quants. It’s partly why the stock trades cheap as a it’s a huge source of demand that doesn’t own the stock.

If they raise money inside Anchorage with help from arms-length party like OMERS that should solve for your concerns and increase book value.

Estimates look very beatable. I think analysts are predicting losses on the equity portfolio and Cat losses in California without any offsetting reserve releases.

I assume they are raising money at Anchorage to support these investments if they come to fruition. Could that lead to a significant increase in the mark on BIAL?

I think the insurance against that is at the high end of that range, FFH, still likely would not lose money in the FTM period that it happens. $5bn of pre-tax cat losses is basically the sum of conservative estimates of investment income, underwriting income and associates income. The combined ratio would be around 110 for the year which is high but very survivable. If it were to happen, the stock would likely have a big drawdown as uncertainty would be high. FFH probably couldn’t take advantage of the drawdown to buyback stock as they would need all of their capital to write business in the resulting hard market. They might tap their credit lines or add leverage on some of their controlled holdings like Recipe as it’s deleveraged post acquisition. Forward ROE should increase enough to make up for the short term hit to returns. The best case scenario is that it happens when FFH has a much higher valuation such that it could issue equity at a big multiple of book and really take advantage of the hard market.

They have dollar limits on exposure so it’s not open ended as many investors think. If it happens with their excess capital, they will be able to take advantage of the resulting hard market better than most and earn back their losses.

The narrative that Prem is a “cigar butt” style investor is incorrect in my opinion, I think he and Fairfax are expected value investors. EV investors can do anything precisely because they don’t have a style. The narrative will change over time as it’s clear they are now focused on quality.

https://whalewisdom.com/filer/fairfax-financial-holdings-ltd-can It’s a tiny position on the 13F

Ultimately, buying FFH is making a bet on expected value investing and most investors are deterministic so they can’t get comfortable. For the last 16 years, buying quality has come with growth and multiple expansion so there has been no reason to change tactics.

Most people invest on narrative so belief is much more important than math. I also think expected returns for most active investors is north of 20% so they don’t think FFH can meet the hurdle as a) they expect multiple contraction and b) they think ROEs will return to 2010-20 levels.

I’m glad Fairfax doesn’t do a lot of personal lines..

It’s even cheaper than it looks as charting software defaults to adjusted earnings as opposed to IFRS earnings(which is also on the low end of expectations as very little is expected from the non-fixed income portfolio.

Based on the known resource which is how NAV calculations are done, I think that’s probably true. Nicaragua has a vein structure so there is no benefit in drilling too far ahead of production so even though there may be decades of resource there, the stated resource is always constrained.

Jurisdiction and execution are risk for all gold mines no matter where they operate. Nicaragua is probably the smallest part of the NAV after Guyana (1) and Arizona (2) even though it provides all of the current cash flow. Recently, Nicaragua was derisked a bit after Trump was elected and his friend Nick Candy decided to buy Condor Gold which only had Nicaraguan development assets and after Equinox decided to merge with Calibre that has significant Nicaraguan production. There is always a risk that jurisdictions try to increase the revenue from commodities but as it stands now revenues are likely well above their expectations.

That was the lesson from the last cycle. This time oil is currently well supplied and valuations for a stock like Mako are probably a tenth of where they would have been 20 years ago. Each stock will have their own idiosyncratic journey of course but it’s certainly an intriguing set up.

I appreciate that but as an expected value investor, the risk/rewards are getting better and better. One can see 5-10x type returns over 5 years. For example, I own Mako Mining. I don’t think it’s that risky now that it has two producing mines and one more on the way. It’s also controlled by Wexford Capital so I get to sidecar for free. There is no analyst coverage so the quants and screens don’t know it trades at < 1x 2027 OpCF. There is optionality on the gold price, on other cap allocation decisions and the multiple as the market cap is big enough for GDXJ but not liquid enough yet.

I’m amazed how cheap some gold stocks are. Money has flown into large cap royalty companies and high quality large and mid caps but otherwise multiples are super low. No one wants to own shitcos no matter how cheap they get it seems.

I’m watching not that closely because cap rates are still so low and the culture of ownership Is still so strong. I have been renting in Toronto since 2008 so I know I’m bad at market timing.