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

Certainly that's been true for the three years 2021 to 2023 that BV has grown by 20%+. But, it's worth taking a long and hard look at the table that Prem publishes every year in his annual letter which depicts growth in BV (it appears on page 22 of the most recent annual letter). Those annual growth numbers result in the much vaunted 18% compounded annualized growth in BV over the 38-year life of the company. One can hold the belief that the entire 38-year historical series is representative of the sort of results that one might expect over the next 38 years (ie, 18% growth in BV is the long-term norm and what we'll get in the future). Or one might hold the belief that the first 10 or 15 years of FFH's results reflect a rapid growth start-up phase that cannot be replicated in the future because FFH is a much, much larger company (eg, BV grew 180% in 1986 and 48% in 1987 but that would be unthinkable with the current asset base), implying that you need to give a substantial haircut to that 18% historical result. Or, one can simply take Prem's publicly stated objective of 15% growth in BV as an "expert opinion" of the sort of annual BV growth that one might expect. When I look at that table that Prem publishes every year, and I squint a little, I see a company that operates primarily in a highly competitive, cyclical industry that produces a commodity (insurance). The value offered by FFH comes principally from shrewd investment decisions, but there remains an anchor on those investment returns driven by the requirement of keeping a large portion of its investment portfolio in sovereign debt. Personally, I do not hold the view that the 38-year historical BV growth number of 18% can be replicated on a going-forward basis and I would be absolutely delighted if FFH were actually able to achieve Prem's 15% goal over the long-term. My guess is that in 2039, we will look back on the previous 15 years and see a 12% annualized growth in BV, but time will tell. One's view on this matters a great deal. As you noted, if you hold the belief that 20-ish percent annualized growth in BV is the new normal over the long-term, FFH is screaming cheap priced at today's 1.1x. If you simply accept Prem's 15% objective as representative of the long-term future, FFH is still very cheap. But, if you look at Prem's BV growth table and you see 12% in the future, you likely wouldn't want to pay more than 1.5x for the shares, implying that the stock is cheap at 1.1x, but probably not outrageously cheap. We shareholders have witness three really good years for FFH, and there's likely another couple of solid good years coming down the pipe. Enjoy them while they are here! SJ

Pete, Thanks for digging into that and summarising the results. That could turn into US$10/sh, and then we should also remember the CVRs from Resolute which might also become a nice little payday. SJ

Yes, if you hold the security forever, you get the discounted cash flows. In the short term, you can be right without being able to monetize it. As they say, in the long-term, we're all dead! SJ

Until recently, the holdco didn't have the money to close out the TRS and buy back the shares. Over the past three years, the insurance subs were growing their books of business so rapidly that they needed to retain most of their earnings to support their statutory capital requirements. It appears like the hard market might be abating, so the subs might now be better positioned to dividend money up to the holdco. Whether closing out the TRS is a priority for holdco cash is yet another question. There are many things that can be done with excess capital, and that might be a secondary or tertiary option. SJ

Absolutely. And it imposes an incremental cash flow risk on FFH's holdco. When the shares go up in price, FFH receives a nice cheque from the TRS counter-party. But, if the shares go down in price, FFH must write a large cheque to the counter-party. So, taking today's price as a baseline, if the shares dropped 25% (this is the sort of thing that can sometimes happen during a market-displacement), FFH would be on the hook for about US$270 per share for those TRS. When you look at Note 5 to the financial statements, that would be a considerable chunk of the holdco's cash balances. So far the TRS have worked out wonderfully well. But, there's a risk in the philosophy that if some is good, more is better! A hypothetical 25% decline in the share price is manageable with the current TRS position size and with existing holdco cash balances, but if FFH were to double that position, it could become quite a challenge. SJ

Definitely not the same thing. But, as a value investor, you attempt to buy something for less than IV and then you hope that the market will eventually realize that you were right and will give you IV (or even better, perhaps you'll get lucky and it'll overshoot!). If the market doesn't eventually award you IV, then you just have to accept the mental thrill of being right when everyone else was wrong, even if you can't necessarily monetize your correctness! Yes, you eventually do get some the benefit of being right, but it can take a great many years, especially if the difference between the prevailing market valuation and IV is small. The key is to be very disciplined about your purchase price, and that holds true whether you are an individual investor or whether you are FFH conducting buybacks! SJ

You keep using PE to describe FFH's valuation, but that's not the best measure for an insurance company with cyclical earnings (particularly if you might be near the top of the cycle!). A buyback at 1.4x BV would be at a valuation that is at the high end of what the market has historically offered FFH shareholders. In short, there's a considerable likelihood that you'd be buying back shares either at or ABOVE intrinsic value, which is probably not a good thing for continuing shareholders. If you are suggesting that FFH should lever-up by borrowing money to buy back shares, that's yet another conversation about what the appropriate gearing should be for FFH and what that means for financial risk. SJ

On buybacks Well there's a couple of factors that matter for the repurchases. The first is the price that you are able to repurchase at (ie, 1x, 1.1x, 1.3x, etc) and the second is the volume that you are reasonably able to obtain. On the question of price, a buyback is only a good thing for continuing shareholders if it is priced lower than intrinsic value. So, you kinda need to think about what your evaluation of IV is for FFH. If you are in the camp that believes that FFH is truly worth 1.5x, then every share bought back at 1.1x is probably one of the best investments that FFH can make (it would be roughly a 73-cent dollar). But, if you are in the more conservative camp and you aren't sure that the market will ever give you more than 1.2x BV, then a buyback at 1.1x probably isn't the best investment as it would be a 92-cent dollar. At a 92-cent dollar, you'd probably hold the view that FFH would be better to use the excess capital to buy out the minority positions held by OMERS, which tend to give OMERS that 8-9% guaranteed annualized return... The second factor is volume, which eventually becomes a problem. Through the NCIB, FFH can only buy back 25% of the daily volume. To conduct a large buyback, you'd probably need a SIB, which usually requires that you offer a premium over the prevailing market price. With a prevailing market price of 1.1x, you'd probably need an SIB price of at least 1.2x to attract shares. And, then at 1.2x, you have to reflect on just how high IV is and whether the SIB is providing an adequate return to continuing shareholders. I was pleasantly surprised that FFH's prevailing market price dropped to about 1.0x earlier this week. At that price, most shareholders will hold the view that a buyback is being conducted at a considerable discount to IV. But, at 1.2x, I'm not sure that you'd have a consensus on that view. On other investments The other thing to keep in mind is that usually purchases like Sleep Country are shared out among the insurance subs (so NB buys XX%, C&F buys YY%, and Odyssey buys ZZ%). The insurance subs need to maintain a certain level of reserves and you need to invest those reserves in something other than FFH's own shares (but there's room for debate about whether Sleep Country is the best investment available). SJ

I find it interesting how the sentiment on this board has swung wildly over the past week or 10 days. Immediately following the Q2 release, posters in this forum were almost euphoric about the EPS numbers, the CRs, and interest income. A short week later, some are almost despondent about Mr. Market suddenly spurning FFH's shares! Whatever. The hard market had to abate eventually and the central bank tightening process was always likely to stop and potentially reverse. In the mean time, the shares closed yesterday at US$1050, which is pretty much bang-on with BV adjusted for the excess of fair value over carrying value. Barring some sort of outrageous growth in the CR, we know that FFH will earn a tonne of money for the next 2 or 3 years, and somebody holding the shares at 1x BV today will likely do perfectly well if those shares are still valued at 1x adjusted BV on Dec 31, 2026. The nice thing about this market pull-back is that FFH actually seems to be serious about repurchasing its shares. I am a cheap bastard and have always been so. When I saw the level of repurchases in Q2, I had a few migivings about it because I didn't view FFH's shares to be table-pounding cheap during the quarter. We can all debate about exactly how high intrinsic value is for FFH - some will suggest 1.2x, BV some will be ballsier and suggest 1.4x or 1.5x - but in any event, we are back down to a share price that strikes me as a no-brainer for repurchases. Even the cheapest bastards (like me) know that FFH is likely worth at least 1.2x adjusted BV. It's nice to see that the company once again has a target for deploying potentially significant amounts of capital in a manner that will create value for continuing shareholders. Just like the Muddy Waters kerfuffle, this is an opportunity rather than a problem. SJ

As time goes on, you sound more and more like me... SJ