StubbleJumper

Yeah, we'll likely see in the Q1 or Q2 how this one turns out. SJ

Yes, if Sagard put in some debt and FFH's position were leveraged, that would improve the net result. No, it shouldn't take a year to close this transaction. The reason why it might end up being an 8-yr hold for FFH is that Bauer isn't quite sold yet. According to the Globe article, FFH is probably hoping to complete the negotiations in late-fall 2024, and then it would typically be a couple of months later that the transaction actually closes (assuming no regulatory issues). If the negotiations drag out for a couple of months longer than hoped or if a buyer's existing business triggers the involvement of competition agencies that could also cause it drag on a couple of months (ie, there aren't many manufacturers of hockey equipment). My understanding was the purchase was consummated in early 2017, so it wouldn't be a shocker to me if this one ends up dragging into early 2025 and becomes an 8-yr hold. But, time will tell. SJ

Well, I hope you are right, but I haven't seen any combination of rumoured capital gains or annual divvies that gets me to a 10%+ annualized return. A US$575m acquisition cost and a US$800m sale would be fine if it were a one-year or a two-year hold...but it's been seven years and by the time they get the cash it could be eight years. SJ

Yeah, that one wasn't a home run. They won't lose money on it but you'd hope for a double-digit return when you buy a speciality business out of bankruptcy. SJ

Yep, the market price was buoyant after the outstanding results of the financial crisis. In 2017, many of us thought that the share price should never drop below US$500. Well, apparently we were wrong! But as you note, that's one thing that FFH has done well over its history. It has issued shares at high valuations, and then occasionally re-bought shares at lower valuations. That's a small, but important part of that 18.3% average BV growth. Turning to your observation about the company being worth only 1.2x BV today, I don't know who you are referring to. I certainly have observed in 2022 that Mr Market would be unlikely to give us more than 1.2x BV any time soon. But, perhaps in 2025, we'll get that 1.2x BV and perhaps even 1.3x. SJ

There was one quarterly release in particular when FFH reported capital losses on its equity hedges AND it reported capital losses on its equity portfolio. That was a particularly dumbfounding earnings release when the company lost money on both the equities it invested in AND the hedges against those equities (if you are hedging properly, when you have a loss on the equities, you should have a gain on the hedges). But, that was how it went. SJ

Edit: Just ignore my comment, I'm mathematically challenged tonight! SJ

Agreed. The value of the holdco cash and the ability to tap into the revolver is that the holdco can quickly inject cash into a sub if that sub had mismanaged its exposures so badly that it had a capital shortfall. But, we have to trust that the subs are carefully managing their exposure and will not have a capital shortfall to begin with. The other value of that holdco cash balance is that large cats like 9/11 or KRW tend to trigger a hard market the next year, so it's nice if the holdco is able to add capital to a sub that might want to write a pile more business the year following the cat. SJ

I'm sure that there's an internal table or schedule with the max impact of specific existential events, but I doubt very much that shareholders would ever get to see that! But, it is somewhat sobering to look at current Net Earned Premiums and then multiply that number by the 13.9% hit from the Katrina, Rita, Wilma hurricanes, or the 8.8% hit from that Japan earthquake. I understand that the company says it's less exposed to hurricane risk on the east coast now than it was for KRW, but those events would still be a big number! SJ

I'm guessing 9/11 or KRW. Edit: after looking up the impact of 9/11 it was 10.3 cat points on the CR and KRW was 13.9 cat points on the CR. As a point of reference, all catastrophes during 2023 were a combined 4 cat points on the CR. @Maverick47 Sandy was 4.5 cat points. But interestingly, the same table in the AR shows the Japan earthquake (the one that affected the nuclear plant at Fukashima) in 2011 was 8.8 cat points, which surprises me even though I probably read that AR a dozen times a dozen years ago. SJ

This is effectively just one element of the broader Capital Gains item. We know that capital gains will be a large element of our long-term return from FFH, but the magnitude and timing are devilishly difficult to forecast. Whether that's the capital gain from something like Stelco or from the Pet Insurance division doesn't really matter, but it's definitely important that the fully owned or partially owned businesses become more valuable over time The book value is what it is. Jen Allen seems solid, so I would say that book value is neither overstated nor understated. A more precise way to state it would be that FFH understands that, in reality, the shares are worth more than book value. The question for an investor is how much more than BV are FFH shares worth? A repurchase at 1.1x adjusted BV is probably beneficial to continuing shareholders because the intrinsic value of the shares is probably considerably higher than 1.1x. The real trick for FFH is to ensure that it doesn't continue repurchases if its shares end up rising above intrinsic value. Maybe that will be a problem for 2025 or 2026? We can always dream! SJ

Well, you might end up being right. It's possible that over long periods FFH's insurance subs will be able to write a 94 CR, buy treasuries at 4%+, and run a premiums to surplus ratio of 2:1, resulting in a ~20% ROE for the sub. Usually in the past, those sorts of returns were competed away as companies retained earnings and capital flowed into the industry (who doesn't want to throw more capital at a 20% ROE?!!). Maybe the institutional investors will steer clear this time, but I wouldn't count on it. The question of premium growth and operating leverage is an interesting one. Operating leverage is highest in industries with high fixed costs. That's not really the insurance industry. Let us hope that most of the premium growth of recent years will endure even if the market softens, but that hasn't always been the case. In softer markets in the past, FFH has allowed written less business. The reason why the operating leverage question is interesting is that FFH's subs had a no lay-off policy during previous soft markets, which sort of converts labour from a variable cost into a semi-fixed cost. You can see the effects of that when you decompose the CRs into their elements and see how the relative importance of the elements changes during soft and hard markets. SJ

Oh no, I'm not missing out on Fairfax at all (at this stage I'd be embarrassed to reveal the percentage of my portfolio in FFH because it's ridiculous, bordering on irresponsible)! I'm just investing with my eyes wide open. When you reach the top of the insurance cycle and the money starts coming in hand-over-fist, it is a mistake to project it too far into the future. To your credit, you only tend to look forward a couple or three years at a time, which I think is probably about the limit of what one can do with any degree of precision. But, when we slap a valuation multiple on the short term results, we are implicitly forecasting the long-term, and for that caution is preferable. Like it or not, the operating subs are subject to the industry competitive dynamics. That involves highly profitable periods where it's relatively easy to grow premium, and it also involves difficult periods when FFH discontinues policies because they are not adequately profitable. CRs go up, and CRs go down. If that's what you mean by being blown around by the wind, well, that's what it is. Management is quite another thing. The reason why anyone would ever invest in FFH is because of the company's investment record. Over long periods they hit just enough home runs to achieve a superior return. Nobody is ignoring that. But, there's an appropriate price for everything. SJ

Yep. We could be in a brave new world where it will be possible to simultaneously write a 94 CR every year and to routinely stuff your float with 4%+ sovereign debt, for a net financing differential of +10%. But, I wouldn't count on it. SJ

Well, Prem's table depicts growth in BV because FFH's earnings have been overwhelmingly retained and reinvested over its history. But the growth in BV in a particular year is really just another way of saying ROE for that year if you haven't paid a dividend or repurchased a bunch of shares. So for most purposes, it's possible to take the numbers in that BV growth table roughly as ROE numbers, and as you noted, it's quite possible that reinvestment will not be the way that ROE gets used in the future. SJ