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Viking

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Viking last won the day on April 3

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  1. @rajpgokul Thanks for taking the time to share your thoughts. Very insightful.
  2. @rajpgokul That was a very well done write-up of Fairfax India - one of the best that i have read. It was very rational, concise and hit on the key points. It is also great to get input from a local investor. Thank you for sharing. Please share anything else you have on Fairfax India/holdings or Fairfax/holdings. Do you have any thoughts on a potential IDBI bank bid by Fairfax India/Fairfax? I am wondering what kind of asset IDBI Bank might be? Something with a lot of potential? Decent management team? Or something probably best avoided? Is banking in general a good business in India? Is that industry well positioned to benefit/grow over the next decade (it looks like it from afar)? Fairfax controls CSB Bank… with my limited understanding of that holding… it appears quality of management has been key to its successful turnaround. Banking certainly appears to fall within Fairfax India’s (and Fairfax’s) circle of competence with CSB Bank (and Eurobank).
  3. @Crip1 Good idea. I have reestablished a starter position in Fairfax India at $13.80. The publicly traded holdings have increased nicely so far in Q2 so we should see a nice bump in book value when they report Q2. BIAL continues to execute well. It’s a little surprising to me that the stock continues to trade below $14.
  4. The FFH-TRS is an investment for Fairfax. From my perspective there are two important considerations: 1.) What is a share of Fairfax worth? 2.) What are the risks of a big drawdown in Fairfax's shares? (With the probability of it actually happening.) On the first point, to state the obvious, Fairfax KNOWS what Fairfax is worth - or at least they know much better than the rest of us. If they still own the FFH-TRS position it likely tells you something about how they view valuation. On the second point, Fairfax is generating record (or close to) earnings. And they look very well positioned for the next 3 or 4 years (I don't look out longer than that). If Fairfax's stock sells off, Fairfax will likely be in a position to buy back a ton of shares at low prices. That is what they did in 2020 and 2021 when they had no money. Well today, the cash is rolling in. Volatility has been great for Fairfax's earnings (looking at the past 5 years). Active management exploits volatility (that is when Mr Market is behaving like an idiot - acting very irrational). Fairfax investors worry about volatility... it is kind of ass backwards. If history is any guide, Fairfax investors should be praying for volatility. I say this tongue in cheek (a little).
  5. @gamma78 You ask the question I am grappling with the most these days: "What will Fairfax do with the significant earnings they are currently generating." But more specifically, what will be the impact on Fairfax's different income streams in 2024 and 2025. We have some answers: 1.) dividend = $15 - this is about 10% of Fairfax's earnings. 2.) share buybacks = $1 billion? - this is about 30% of earnings 3.) buy out minority partners in insurance = $500 million? - this would be about 15% of earnings - this hasn't happened The three items above 'account' for about 55% of earnings - and are built into my 2024 forecast. The remaining 45% of earnings? This is probably a good example of where my forecast is too conservative. Especially when compounded over a couple of years. I am forecasting modest organic growth in net premiums written. And small growth in the investment portfolio (including fixed income). I am not including any large, one time investment gains in my forecast for 2024 or 2025. We know there will likely be some (at some point over the next 24 months) - we just don't know what they will be, their size and the timing. I keep waffling on whether to keep these in the forecast... I removed them from the latest. I would appreciate how other board members are thinking about this same question: "What will Fairfax do with the significant earnings they are currently generating." And what will be the impact on Fairfax's different income streams in 2024 and 2025. ---------- Eurobank dividend: Earlier this year I had assumed Eurobank's dividend would show up in 'interest and dividend income.' But at the AGM the people I talked to said because Eurobank is an associate holding the dividend will not be reported in interest and dividend income but instead will show up in the cash flow statement. Perhaps those who have an accounting background can comment further. --------- The impact of the Digit IPO will be something to monitor. Especially once Fairfax gets their ownership position confirmed. There may be a realized gain (I am not sure how everything will play out from an accounting perspective). I am not concerned.
  6. Earnings Estimates – Two Year Summary for 2024 & 2025 Below is my updated two-year earnings estimate for Fairfax. This forecast includes learnings from Fairfax’s Q1, 2024 earnings release and ‘new news’ from the past couple of months (since the last update). Summary My current estimate is Fairfax will earn about $155/share in 2024 and about $160/share in 2025. I think both of these estimates have been constructed using mildly conservative assumptions. Will retained earnings be re-invested in a way that builds value for shareholders? Perhaps the hardest piece to forecast with Fairfax today is what they will be doing with the substantial amount of earnings that they are currently generating (more than $4 billion per year). And the impact the re-investment of current earnings will have on future earnings. Both the size - how much. And the speed - how fast. When it comes to re-investing earnings, Fairfax has lots of very good options: Grow insurance (continuation of the hard market; bolt-on acquisitions) Buy out minority partners in insurance? Buy equities or fixed income securities? Buy back a meaningful amount of Fairfax stock? Other? Looking at the last 5 years, the management team at Fairfax has done an outstanding job with capital allocation. My guess is they will continue to make good decisions (on balance) and this will benefit shareholders in the coming years – likely providing a tailwind to my forecasts for 2024 and 2025. What are current analyst’s earnings estimates for Fairfax? Using Yahoo Finance as a guide (June 3, 2024), analysts estimate that Fairfax will earn: US$138/share (C$188) in 2024 US$152/share (C$208) in 2025 From what I can see, most analysts are assigning little benefit to the reinvestment of Fairfax’s significant earnings and the company’s proven capital allocation skills. My read is most analysts will include these benefits into their earnings estimates only after Fairfax has announced something. Interest rates: I am assuming interest rates remain roughly at current levels (at June 3, 2024). Of course, this will likely not be the case. Given the duration of the fixed income portfolio (a little under 3 years?) is now closer to the duration of the insurance liabilities (a little under 4 years?), changes in interest rates might roughly balance out (in ‘net gains/losses on investments’ and ‘effects of discounting and risk adjustment- IFRS 17’). Below is a 5-year snapshot of earnings for Fairfax. It communicates in a concise manner the dramatic transformation that has happened at the company, beginning around 2021. There has been a spike in operating income per share – from an average of $39/share from 2016-2020, to $192/share in 2023. This much higher amount now looks like the new baseline for the company. For 2024, my estimate has operating income increasing to $199/share, which is a 400% increase from the average from 2016-2020. ‘Normalized earnings’ at Fairfax have moved to a much higher level – and, importantly, this higher level looks durable/sustainable. What are the key assumptions built in to the forecast? 1.) Underwriting profit: Estimate = $1.24 billion in 2024. Net premiums written growth of 12% in 2024 and 3% in 2025. This is being driven by: Continuation of the hard market, which we estimate will add $1 billion of NPW. The Gulf Insurance Group (GIG) acquisition, which will add $1.7 billion of NPW. Combined ratio (CR) of 95% in both 2024 and 2025. Catastrophe losses: 2024 will be a more normal year (higher than 2023). Fairfax continues to modestly shrink their total catastrophe exposure. Reserve releases: continuation of the positive trend observed in 2023. 2.) Interest and dividend income: Estimate = $2.38 billion in 2024. Interest and dividend income in Q1 2023 was $590 million; this provides a good baseline. GIG added $2.4 billion to the total investment portfolio in late 2023. Rate cuts by global central banks could be a headwind in 2H, 2024. 3.) Share of profit of associates: Estimate = $900 million in 2024. Earnings at Eurobank and Poseidon/Atlas should continue to chug along. Stelco (steel) EXCO (nat gas prices) results will be volatile. GIG will be a small headwind as it is now a consolidated holding. 4.) Effects of discounting and risk adjustment (IFRS 17): The two key drivers for this bucket are the trend in net written premiums of the insurance business and changes in interest rates. Net written premiums growth of 12% in 2024 should be a tailwind. This bucket is difficult to model – my confidence level in my estimates is low. 5.) Life insurance and runoff: Estimate = $250 million in 2024. This combination of businesses lost about $348 million in 2023 (not including investment returns). I expect 2024 to be a little better, with life insurance being a modest tailwind. 6.) Other (revenue-expenses) - non-insurance subsidiaries: Estimate = $150 million in 2024. Recipe, Dexterra, AGT, Grivalia Hospitality, Boat Rocker etc. This combination of businesses earned $46 million in 2023. This bucket is poised to grow nicely in the coming years. Yes, the results will be lumpy. 7.) Interest expense: Estimate = $610 million An increase to prior year which was $510 million. 8.) Corporate overhead and other: Estimate = $435 million in 2024. A modest increase to prior year which was $430 million. 9.) Net gains on investments: Estimate = $1.075 billion in 2024. The big driver will be the FFH-TRS position. $250/share x 1.96mn shares = $500 million? Remaining mark to market holdings of $7 billion x 7% return = $500 million? 10.) Gain on sale/deconsol of insurance sub: Estimate = $0 in 2024. Simply being conservative. This is where I put the large asset sales/revaluations. These items are difficult to forecast. I will add these items to my forecast when they happen. 2023 transactions: sale of Ambridge and the revaluation of GIG = total of $550 million. Bottom line, this bucket is a wild card. But Fairfax has a long history of surfacing significant value hidden on its balance sheet. When they do, we see significant realized gains (from both insurance and non-insurance holdings). 11.) Income taxes: Estimate = 19% (historical average rate) 12.) Non-controlling interests: I am expecting Fairfax to take out one of its minority partners in 2024. From my perspective, the leading candidate looks like Brit. My second choice would be increasing their ownership in Allied World to perhaps 90% (from 83.4% today). In the past, I used an average rate of 11% (amount of net earnings that was allocated to non-controlling interests). This has been reduced to 9.5% in 2024 and 7.5% in 2025. This change increases the amount of net earnings going to Fairfax shareholders (the numerator in the EPS calculation). 13.) Shares Outstanding: Estimate = 22.2 million effective shares outstanding (Dec 31, 2024). This would be a reduction of 800,000 shares in 2024 (3.5%). A significant number. To May 10, effective shares outstanding have been reduced by 561,102 to 22.44 million. Notes: Underwriting profit’: Includes insurance and reinsurance; does not include runoff or Eurolife life insurance. Interest and dividends’ and ‘share of profit of associates’: Includes insurance, reinsurance and runoff. ————— Return on Equity Calculation Return on equity (ROE) is calculated using ‘average equity’ which is: (PY ending BV/share + CY ending BV/share) / 2 I think most of the industry (other P/C insurance companies, analysts) calculates ROE using an average number for equity. This should make my ROE estimates comparable with industry numbers.
  7. Parts of the Phelan family still own 16% of Recipe (Fairfax owns the other 84%). Interesting story / bit of Canadiana... The food fight for Swiss Chalet’s owner is a lesson for all family companies Hopefully the link below works (the article is behind a paywall): https://www.theglobeandmail.com/gift/ec504d70a4c6763bef7b3e7b87d07bf3bdfd3e8486a41630e08b66b2b94a0e29/UMHHEN6ZJZBDZO5SDLUVLKDVXU/ "In the 1990s, the Phelan family ranked among the country’s wealthiest clans. Their restaurant chains – including Swiss Chalet and Harvey’s – served millions of meals and cranked out millions in profits for parent company Cara Operations Ltd., now known as Recipe Unlimited Corp. Patriarch Paul James Phelan – PJ to those who knew him – wanted the 100-year-old business to remain in family hands for another century. It wasn’t to be. "A bruising, years-long battle for control of the company pitted PJ Phelan and his son against two of his daughters, Gail and Rosemary. It ended in 2003 with the women winning control through a debt-funded buyout, then eventually handing the reins to insurer and asset manager Fairfax Financial Holdings Ltd. "Author Stephen Kimber captures the bitter fight for Cara in The Phelan Feud, published on Friday. Working with surviving family members – PJ Phelan died in 2002 – and with full access to court documents and private family records, he has written a book filled with intrigue, betrayal and high-living, including family-backed yachts vying for the America’s Cup. It’s a story with poignant lessons for any family, with special relevance to the privately owned businesses that are major contributors to the country’s economy."
  8. When you compare Fairfax’s income streams to traditional P/C insurers there are big differences. Here is the split for most traditional P/C insurers: - underwriting = 50% - interest and dividends = 45% - misc = 5% A soft market in insurance will impact Fairfax’s earnings much less than it will impact traditional P/C insurers. Fairfax’s split for underwriting income is 20 to 25%. Fairfax is way more levered to investments. Fairfax’s significant share buybacks are also important. It is meaningfully increasing all the per share metrics: - investments per share - float per share - earnings per share I hope Fairfax continues to be aggressive with share buybacks. They are generating so much cash. The stock is cheap. It is such an easy / beneficial use of capital.
  9. If you wanted to understand the 'transformation' that has happened at Fairfax over the past 4 years in one chart this would probably be it. Note: my original chart had a calculation error which has been corrected in the chart below. I will talk to quality control to review what happened The 5 income streams below flow into Fairfax's earnings: 1.) The total from all 5 income streams has increased from $1.8 to $5.7 billion. - from $68/share to $259/share or 282%. 2.) Operating income has increased from $1 billion to $4.5 billion. - from $39/share to $204/share or 426%. High quality operating income now represents 79% of all income streams, up from 55%. That is a game changer.
  10. I think looking at the flow of people might be a good indicator. People ‘vote’ with their feet. It seems an awful lot of people from the rest of the world desperately want to get into the US/Canada/Western Europe. I don’t think your view is a ‘brainwashed simplistic Western view.’ Hong Kong provides a great case study. They went from a democracy to a dictatorship. My understanding is pretty much everybody who could get out got out (or made alternative arrangements to be able to exit at some point in the future). How about Russia? My son is at an age where he would likely have been conscripted into the army and would be fighting in the war in Ukraine. No thanks (putting it politely). India will be interesting to watch moving forward. I certainly hope they continue to shift towards capitalism (and away from socialism). While maintaining their democratic/rule of law framework.
  11. @glider3834 thanks for bringing this forward and for providing so much detail. The first step was getting approval from regulators. Getting that done and this quickly is a big deal. The Hellenic Bank acquisition is shaping up to be a significant near-term catalyst for Eurobank’s business and earnings. Hellenic Bank’s pending big move into insurance adds another really interesting layer to this story. Step 2 is proceeding with a mandatory offer and that is where we are today. The article you linked to says this process should be completed by the end of July. It will be interesting to see what quantity of shares get tendered at EUR 2.56. I have no idea how this plays out. I am confident Eurobank has a plan. Their Q2 earnings call should be interesting. Perhaps a few of the research houses (like Morgan Stanley) shed some light on how things might unfold.
  12. Sanjeev, thanks for managing a great forum. The fact you have been able to keep it going for +20 years is amazing. The stuff i have learned, and the value i have received over the many years has been priceless - it has been a life changing experience for me and my family. More recently, the relationships built has been icing on the cake.
  13. Given Ben's critical role at Fairfax in the coming years this likely makes a lot of sense (as an interim step). Given Prem's age, time for Ben to get more responsibilities. Ben has been pretty focussed on India (based on his comments the past year). Importantly, Prem and Chandran will still be at Fairfax India and will be able to mentor Ben. ---------- From the Corporate Governance Institute https://www.thecorporategovernanceinstitute.com/insights/lexicon/what-is-the-role-of-the-chair-of-the-board/ A good chair provides leadership to the board rather than the company. The chair’s primary role is to ensure that the board is effective in setting and implementing an organisation’s direction and strategy. Therefore, the chair is responsible for leading the board and focusing it on strategic matters, overseeing the company’s business, and setting high governance standards. The chair plays a pivotal role in fostering the effectiveness of the board and individual directors, both inside and outside the board room.
  14. @petec, as is usual, you make a very insightful point. There has been an enormous amount change in the results that Fairfax is delivering today compared to 5 short years ago. I thought it was refreshing to hear Prem at the AGM say even Fairfax did not see it coming (the magnitude of the change). To capitalize on Fairfax the past 5 years, an investor has needed to: - stay inquisitive - keep an open mind These are two traits Stan Druckenmiller said he looks for in new hires. Investors who were unable ‘stay inquisitive’ and ‘keep an open mind’ completely missed the opportunity that has unfolded with Fairfax over the past 5 years. They probably still are. I started to get interested in Fairfax as an investment again (in a big way) back in 2019. I had no idea this is how things would play out. It has been an absolutely crazy ride (in a good way). Many long-term Fairfax watchers have made similar comments in the recent past. The ‘facts’ have been changing at a mind-boggling pace pretty much every year for the past 5 years. So much so, it has been hard to keep up. External events certainly helped. You have highlighted this in the past. - Hard market in insurance. - Interest rates normalizing at much higher levels. - Record bull markets in steel and lumber. - Wicked volatility in bond and stock markets. And Fairfax’s execution has been unbelievable. They have hit the ball out of the park on numerous occasions. The end result is we are now in uncharted territory with Fairfax. 1.) What is a ‘normalized’ level of earnings? 2.) How much will earnings grow in the comings years? 3.) What is the intrinsic value of the company as it exists today? Of the three questions i ask above, i think we are probably able to answer the first with some accuracy. Because we have 2023 in the books. The second question? This is where i think investors are way off base today (too low). And this is then resulting in a big miss with question 3 (also too low). Looking ahead another 5 years… I can’t wait to see how things play out. ————— Looking 5 years into the future (2028), what will Fairfax deliver? 1.) Float per share? 2.) Investments per share? 3.) 5 year average return on investments? 4.) Net Premiums written per share? 5.) 5 year average combined ratio? 6.) Earnings per share? For each of the measures above, ‘amounts accruing to common shareholders.’
  15. @modiva I included the numbers since inception because those are the numbers that Fairfax has actually delivered. Having said that, i did not include those numbers to suggest that is the performance that they will deliver (across all metrics) moving forward. I think Fairfax can deliver mid to high teens growth in BV in the coming years. Float? No, not that high. I do think the numbers Fairfax delivered from 2010-2020 are artificially low. If we think it makes sense to throw out the numbers from the early years (because they are artificially high) then i think it might also makes sense to throw out the numbers from 2010-2020. The numbers from 2010-2020 contain so much noise (like $5.4 billion in losses from the equity hedge/short positions that won’t be repeated in the future) that it affects their usefulness as a baseline to project what might happen in the future. But i do get your point.
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