MMM20

$900-1000+ USD stock would be in line with the post-'08 average P/B multiple of ~1.1-1.2x when you adjust for gains from Brit, GIG, and Digit. BVPS is really ~$830+ USD and ~$850+ fully marked to market. Intrinsic value is clearly $1500-2000+ USD.

I think it's also worth highlighting that they bought back 0.7% of shares last quarter and still didn't unwind the total return swaps. There are attractive alternative uses of cash right now, but seems like the Teledyne plan is still on track.

That a majority stake in BIAL would likely trade at a significant premium to that valuation. Everything else is likely valued at a large negative number.

Yup. Looking more and more like (good) endowment style portfolio management. Market is slow to recognize the value of that for high incremental return opportunities across asset classes and geographies. KW stock may or may not be cheap but what we can bank on is that they’ll bring FFH good coinvestment opportunities that may arise from CRE distress, and FFH should have $2-3B+ annual cash flow to allocate to such things over the next few years at minimum. I could see them doubling their capital allocated here over the next few years if things break a certain way.

@OliverSung Don’t sell yourself short. All-time great first post. I’ve been a fan of your work for years but must’ve dropped off your list when I switched jobs, so thanks for sharing! A few of my favorite parts: “While everyone ran around discussing whether Prem and co had lost their magic touch, Fairfax’s insurance group marched ahead in the background to build a track record of growth that would put it on par with a thriving tech company.” “A $55.5bln investment portfolio, roughly half of which is financed by 5% negative-interest float (Fairfax’s current 95% combined ratio) is coiled to churn out vastly different earnings numbers in a higher-interest environment than Fairfax has ever witnessed. Due to this humongous increase in cash-making float, Fairfax is in another form than it’s ever been and the company’s past history gives poor clues as to how it may perform in the future” ”Family-controlled insurers are, ceteris paribus, better positioned for opportunism on the investment side. The result? As Fairfax slowly ramped up the duration in conjunction with rising interest rates, it took its run rate of $530mln in interests and dividends and tripled it to a current run rate of $1.5bln which now approaches a three-year duration. I’ve heard a lot of Fairfaxers are disappointed about Fairfax not extending those durations further but I don’t see why Hamblin Watsa would settle for 3-4% when they have lots of other options, including writing >7% mortgages with Kennedy Wilson at average three-year terms. Cash and cheap stocks may also be better options as of now.”

keep hoovering up shares instead!

I took it to mean *originating* at 60% LTV in aggregate, which is much more conservative than the average underwriter as I understand it. Fair enough point that the average doesn’t tell us about the distribution but I’d be surprised if they underwrote any loans >80% LTV if 60% is the average. Also fair point that floating is good for inflation protection until a bunch of underwater borrowers hand you the keys. On the flip side, if you have the ability to foreclose and finance the assets and hold longer term, your recovery should be quite good unless things really fall apart. Just look at returns on CRE last decade. Still, I like that risk reward at ~60% LTV (even if it’s now looking more like 70-80%? after valuations reset) with some inherent inflation protection in the underlying assets. Much better than most other fixed income. It’s possible I’m missing something but it seems like it would take cap rates nearly doubling (valuations on mid cycle ish earnings getting cut in half) for Fairfax to lose money on these loans. To Buffett/Munger’s point yesterday, in this sort of environment the assets won’t go anywhere but the ownership may change hands. Maybe an opportunistic Fairfax will end up a beneficiary of that, starting as they are from this position of short duration strength in fixed income.

This (plus the whole floating rate thing) is a critical point in today’s world. Many loans up to 80-90% LTV could be permanently impaired now. Cap rates and attachment points got way too tight and high in retrospect. To Buffetts point yesterday, commercial real estate valuations are essentially driven by how much lenders will lend to a sponsor without requiring recourse to the parent. In my experience there are probably more bull market geniuses in real estate than any other market. A guy like Tom Barrack is the poster child but there are dozens of others… all prob still holding out hope that the day of reckoning will never come and they’ll never have to mark stuff down. Another example of FFH managing their affairs prudently over the past few years and coming out smelling like roses.

Buffett again today talked about the superiority of float when it is cost free (or negative cost). It can't disappear in a hurry and it finances the asset side in the same way as costly equity or debt. Berkshire has $165 billion of float vs just shy of $1T in assets = ~17%. Fairfax has ~$30B of float vs ~$60B in assets = ~50%. I’m not normally a bold/underline guy but FFH has ~3x the float of BRK, adjusted for size. Much of BRK’s outperformance during Buffett’s early/middle decades was a direct result of zero cost float leverage. This is not a knock on Buffett as recognizing this dynamic decades ahead of the crowd was probably his biggest stroke of genius. For FFH, float has become a huge and still misunderstood / undervalued structural advantage. Float growth driven by well-timed acquisitions ahead of the recent hard market has been incredible, to echo @Viking. As a result, FFH going forward should generate mid-teens shareholder returns — so an expected return of a double every ~5-6 years on average, even if zero multiple expansion — with only decent mid-high single digit investment returns. Ok, I’m a broken record

I enjoyed this one. I feel like he was more open and candid b/c it’s a Nebraska Furniture Mart podcast.

@Viking What I'm most worried about as I plan to hold FFH indefinitely (absent an overnight 3x spike ) is related to #5. Are we heading for an ugly "Succession"-like scenario if Prem doesnt end up with, let's say, the intellectual longevity of a Buffett/Munger, but others at Fairfax don't actually have the power to force a change? Maybe FFH buys back enough stock for Prem to regain majority voting control and just never gives up the reins, even if he should. Shareholders might be blind to this sort of dynamic for a while b/c the shareholder communication (while recently improved IMHO) is always been a bit awkward and fumbling, the letters somewhat disorganized and rambling compared to a BRK or a MKL. Will the top executives actually stick around if Prem's still in his seat 5-10 years from now, even if he continues to delegate various responsibilities? Maybe a bunch of those folks will get picked off by competitors and slowly erode FFH's talent base as the strong recent performance becomes clear to the market. I really don't think we'll end up with a senile shell of Prem and and some weak puppet successor slowly running FFH into the ground, but hopefully you get my point. Anyway, another great post...thanks @Vikingfor sharing so much of your work.

“Two of its businesses, Berkshire Hathaway Energy and BNSF Railway, account for more than 90 percent of the company’s fossil fuels consumption; each discloses its carbon footprint and a timeline for reduction. Berkshire Energy, which serves 12 million customers, says half of its electricity stems from noncarbon fuels. (About 40 percent of electricity in the United States is generated using zero-carbon fuels.) Berkshire Energy has invested more than $30 billion in renewables, much of it on infrastructure to, as Mr. Buffett puts it, get power from where the wind blows to where people live. Meanwhile, it has been shuttering coal facilities.” Berkshire might literally be doing the most of any single corporation to *actually* decarbonize the US, but clearly not doing the most to virtue signal and that’s the real problem for these people. ESG ratings remain a complete sham.

https://rogerlowenstein.substack.com/p/the-oracle-of-omaha-takes-on-progressives Can’t get enough of Roger Lowenstein or Buffett. The combo is gold.

It's pretty incredible that they missed selling BB at ~$25 b/c they were locked up at exactly the worst time - and oh BTW also took off their shorts at basically exactly the peak of all the insanity - and still sit here today with FFH having ~2x'd and still trading at like 6x earnings and seemingly on a clear path to 2-3x'ing over the next few years with just decent execution. Epitome of how a few big good decisions can far outweigh mistakes and bad luck.

I would say “submit this to VIC” but I’m happy to let FFH take out as many shares as they can at 6x earnings.

We’ll have to agree to disagree!

4.8% to 5.0% market share is statistical noise. A rounding error. Very different than a insurtech startup going from 0 to 10% in a few years and blowing up spectacularly. Worth monitoring with a Digit but I believe an unfair criticism of FFH as a whole… no new kid on the block.

I put zero stock in my own personal view on that. But I do think Research Affiliates estimates and confidence intervals above are better than nothing in framing asset allocation decisions. I also think FFH has earned shareholders trust on that front. Frankly I would look at what they’re doing rates+credit and let that inform my own positioning. Clearly it’s prudent to assume reversion to the mean on insurance growth and profitability. But that doesn’t mean things are about to fall apart tomorrow or that float will shrink, just that this piece will prob grow much slower over the next few years than the last few. I think the most important thing is that FFH has built up a big structural advantage in that float over the last 5-7 years with smart acquisitions and organic growth. And now we really need no additional insurance growth - just good management - and only ok investment results for FFH to compound at 2-3x the returns of a 60/40 index portfolio from this starting point. I think that’s true whether we end up with 1% or, idk, 8% returns from cash+fixed income.

Something like 4-6% on cash/fixed income, 10-12% on all equities, and little to no growth in insurance but an aggregate 98-100% combined ratio Excess cash -> buy back stock and minority interests, then more stuff like their recent JAB investment as opposed to early 2010s era rescue financings That pencils out to ~15-17% EPS CAGR = ~4-5x EPS growth over a decade… valuation on earnings doubles or better to a fair 12x+ multiple = ~8-10x MOIC Just one scenario and guaranteed to be precisely wrong, but IMHO no heroic assumptions…those are just market beta type e(r)s, and seems like the insurance side still has runway to “top 10” status from this position of strength (and/or might sustainably underwrite to 97% or better combined) I continue to believe 12-15x earnings (yes, 2x+ BV) is quite clearly much fairer than 6x if looking forward instead of backward… still not holding my breath I was just trying to point out the potential power of so much ~0% cost float leverage (and a low starting point for valuation) if they continue to execute well

Data below is from Research Affiliates...IMHO one good way to frame expected returns and the range of outcomes from the top down to supplement the bottoms up work that @Viking and others have laid out so well here. ~7.5% asset level return with about half financed with ~0 cost leverage and a shrinking share count (and minority interests) = ~15%+ total shareholder return, even if valuation stays at mid single digits on earnings.

~7-8% return on investments would be a home run b/c it translates to ~15%+ return for FFH shareholders b/c of leverage. Rough numbers, roughly right. If FFH underwrites at breakeven, that equates to borrowing at a 0% interest rate on roughly half the asset base at the current size of the insurance operations. This is why the intelligent growth in the insurance side over the last 5-7 years is such a big deal even if they “only” break even longer term. Buffett has talked about that power of insurance float for 60 years and it is still widely misunderstood IMHO… at least in the Fairfax case. FWIW, that float leverage is a big absolute *and relative* advantage for well managed insurance companies again, with borrowing costs for other industries back off the zero bound. Also, as they flip to highly cash generative, the share count and minority interests should continue to shrink. From this valuation starting point, that all could translate to a ~8-10x return over the next decade with mid teens EPS growth (even with zero growth on the insurance side) if the “exit” multiple expands to a fair low-to-mid teens multiple of earnings. Haters would be in shambles not investment advice

Same question. I would’ve thought Prem’s kids would get the most pushback.

Right. At this point, ~$800M for GIG is about one quarter (maybe two) of sustainable and growing free cash flow. Stock still screams cheap to me every day it trades below US$1000 if not US$1500.

I’m never quite sure how meaningful “PV-10” is when I see it in oil/gas. Just means a 10% discount rate, right? I easily get to $2,000+ share PV-10 value for Fairfax itself, so we’ve got that going for us.

Analysts starting to get it...maybe just less career risk now that the stock has been up