SafetyinNumbers

That’s my point, there wouldn’t necessarily be a 30% hit. IFC could probably raise money to cover the hole, down < 2%. The higher the multiple, the easier and cheaper it will be to raise money. As a business owner, it’s a much better position to be in. Owners of liquid securities on the other hand that use value as a factor especially are deathly afraid of drawdowns no matter their cost base.

It’s perhaps not obvious but the higher the valuation the better the ability to handle the punch. That’s why I’m not as excited about FFH staying cheap like I think most shareholders prefer. With respect to IFC, they trade at ~2.9x BV, they could replace the float very cheaply and more with a 2.5% equity issue that would be incredibly accretive. My only guess as to why they haven’t done it yet is because they have an acquisition planned to acquire float cheaply for stock.

Definity and Intact preannouced big CAT losses for Q3. Fairfax will get hit hard in Northbridge but Canada is ~10% of premiums so it shouldn’t be as bad. While IFC has hardly moved on the announcement, I find it hard to believe FFH wouldn’t be down big if they pre-announced a $68 hit to pretax earnings for Q3 on CAT losses. Thoughts?

How many years would it take to recover those earnings do you think?

If we had to place odds (and in a way we are) what probability should we assign to a 93, 95, 100 or 105CR for the next 15 years. The fairest way is to probably measure in aggregate over a 15 year period and not an average because if there is a SuperCat in that time frame, there will probably a big increase in premiums for the years that follow.

The way I like to think about it is that the odds of earning north of 15% for the next three years could be as high as 90%. Also, the odds of earning 20%+ are much higher than earning 12% or less. That makes buying at 1.2x BV seem like an incredible bargain but I appreciate many on this board think it’s fairly valued currently.

I think keeping the excess liquidity at the insurance subsidiaries makes a lot more sense then sending it up to the holdco for a variety of reasons but principally the debt levels are less concerning while that is true.

Because they can always sell a stake again if they need capital for any other opportunistic reason but perhaps more importantly a defensive reason. It also removes the minority interests which boosts the total nominal earnings.

If you do all of your analysis without looking at the facts or doing any math I can see why you think FFH forward ROE is 10-12%.

I guess it depends on how you carefully you calculate returns. The EV of the acquisition was $575m but that must have included some debt as FFH only put up $154m. They have received $72m of dividends so far reducing the net investment to $82m. The rumoured selling price of $800m seems low for the whole EV with EBITDA north of $100m so my guess is that is just for the equity. I’m not sure why it will take a year to close but to achieve a 10% CAGR (i.e. double digit), they would need to receive net proceeds of $330m less the present value of the dividends received already but if we don’t give them much credit there, they only need to clear ~$250m on the sale which is ~$600m for the equity value. That means there could be $200m in debt included in the $800m selling price. It’s another ~$6+ in earnings that no analyst is forecasting.

They own 43% according to the annual report. Given the purchase price, return of capital from dividends and the rumoured selling price that seems to easily be a double digit return. Also another source of Q4 gains that analysts aren’t factoring in to their estimates.

1. I think it was $3b at the end of 2023 for the insurance subsidiaries they could dividend up. I might be too high thinking that’s up from year end. They have been slowing premium growth and sending dividends up for buybacks but I don’t think dividend capacity has diminished. 2. I’m just using the non-controlling interests note from last year which showed ~$2.5b as the balance for Allied, Brit and Odyssey. It’s probably higher now. 3. The table shows ~$500m in earnings for 2023, so that gives us some idea. It seems like the P/B multiple FFH buys back the minority interest is the same multiple they sold at so maybe the returns are highest for Allied World, then Brit and finally Odyssey. I like buying the subs in vs buying back the stock because it increases durability. This is something, I think analysts could model in over the next few years to show earnings growth but they remain committed to conservatism as opposed to making the best guess.

E-L Financial is 20% insurance (Empire Life) and the rest is index/global quality portfolio. 12%+ for 50+ years.

That’s about all it takes to appreciate the earnings power if one understands the value of float. It’s perfectly set up to buy the dip as well if there is in fact a market sell off.

There is such bifurcation between quality and sh!tcos that deeming there to be no value based on the aggregate stats seems like a risky choice. That’s why I thought you might like Fairfax. It’s got almost $2 of cash equivalents with relatively short duration for every $1 of shares you buy. Plus about 80 cents in equities with a high earnings yield because its mostly sh!tcos.

Do you own any Fairfax Financial or do you also find it expensive?

When the market would get weak, portfolio managers would sell their other financials and buy FFH because it was hedged. That should still be true because the financial position FFH is in right now affords it so much optionality. If FFH can dividend out $4b from the insurance subsidiaries to the holdco that means they can buy a lot more equities at the subsidiaries if the opportunity presented itself. That could supercharge returns. They seem almost certain to buy in their insurance minority interests which have a 20% return based on trailing results. The cost as of December was $2.5b so that might add ~$20/sh to EPS. Return expectations are super low for the non-fixed income part of the portfolio. I think consensus probably reflects closer to 6% on a FTM basis. While these numbers might seem reasonably conservative, Fairfax has a few big engines in Eurobank, Poseidon and the TRS that are expected to provide 25%+ returns on 20% of the carrying value of the non-fixed income portfolio. That means 5% of the 6% expected is covered and the remaining $16b of non-fixed income has a very low hurdle to beat consensus. That’s why 15% ROE doesn’t seem like it’s difficult and 20% might be more likely than 12% for the next 5 years at least.

I was rounding up 1.192 to 1.2 as it shows in the chart.

Yet it raised money at 1.3x BV in 2016 and traded as high as 1.6x a year earlier but is only worth 1.2x BV now according to the market.

They probably still make money that year.

3-3.75b based on 1-1.25%. Fairfax might breakeven in a year like that.

The reason I’m so bullish is because the margin of safety is so high. Unfortunately, for my own net worth, I have historically sold as soon as a stock gets to a price where I wouldn’t buy it anymore. I’m trying to avoid that this time with Fairfax because I can see all of the ways the right tail can surprise to the upside. The focus of this discussion and the most of the analysts that cover the stock is the downside. There is almost no analysis of the returns of the non-fixed income portfolio. The two biggest pieces generate mid-high teens returns on their carrying value. That means the TRS and the rest of the non-fixed income portfolio don’t have to do much to boost returns. It’s possible FFH will get added to the S&P/TSX 60 next month as AQN continues to sit below 20bps in the benchmark (the committee might also defer to December or put TFII in instead). I assume a lot of our fellow shareholders will sell stock into price insensitive buying whenever it happens because they think the shares are fully valued at 1.2x book or wherever it ends up. Perhaps, that will end up being the right decision in the short term but it just seems so unlikely in the long term.

What’s the over/under on when FFH has a combined ratio of 100 or above for a full year?

That’s only part of the return although I do think insurance is a growth market because of climate change. I also think a lot of institutional investors that previously would have shown up to take advantage of the opportunity prefer less volatile returns so instead are in private equity and private credit. Do you think the recent large premium growth has added any permanent operating leverage for Fairfax or will it all be given back in price? What do you model for forward returns on the equity portfolio?

I think the assumption that returns should mean revert is a mistake because it doesn’t consider the actual balance sheet leverage, available returns on new investments and what’s already in the portfolio. I think it’s really hard to model ROE averaging less than 15% over the next 5 years based on the current outlook. Maybe you are correct, ROE will fall precipitously after that but my intention is not to sell unless forward ROE is expected to be < 10%. That seems far away for now.