Thrifty3000

Thanks @Viking . It looks to me like the top 5 holdings alone could generate look-through earnings in the ballpark of $1 billion. Since the top 5 holdings represent about half the equity portfolio, it seems like your $1.8 billion earnings estimate for the equity portfolio is perfectly reasonable. Once again, thanks to your work, I’ll have to upwardly adjust my financial model. I have been underestimating the earning power of the equity portfolio.

Regarding the dividend, if memory serves, I believe one of FFH’s largest and most loyal shareholders has routinely been popping up on quarterly calls and politely asking Prem to consider a dividend increase. I like that Prem is setting an example here of how to be fair and friendly to long term investors. I also think there is psychological managerial benefit to being on the hook for paying your investors a dividend. It helps make managements more financially responsible. My hunch is managements that don’t pay a dividend are more apt to spend money on nap pods, trophy office spaces and moonshot bets. I assume the intangible benefits of investor goodwill and cultural discipline will ultimately offset the added tax burden.

In roughly 2010 I did 2 internet searches that led to my initial investment in FFH. First, I googled the phrase “Warren Buffet of [insert country name]” for a number of countries like Canada, England, Australia, etc. That was probably the first time I learned about Prem Watsa - the “Warren Buffett of Canada.” Second, I searched for “value investor message boards” which, of course, led me to COBF. Additionally, I remember reading one of the Berkshire annual meeting transcripts - around the time of the GFC - where Buffett had mentioned a Canadian insurer that almost perfectly timed the housing market crash with credit default swaps. I quickly learned it was FFH. Somewhere around 2010, after learning Prem and Fairfax were approaching legendary investor status I bought a few thousand dollars worth of shares. Maybe $50k. After following them for a decade, in 2020 I figured FFH was nearly certain to earn $28 to $35 per share. I really liked what I knew about Prem and the company, so when the shares hit $250 during the Covid crisis I bought 10 times more shares. After 2020 I monitored the discussions on this board very closely, and thanks to @Viking and others I realized I was vastly underestimating FFH’s true earning power, so I continued doubling down until I had over a third of my net worth invested (at somewhere around $400 per share). So far so good. I haven’t sold yet, since I still consider the shares undervalued, and since I’m still plenty happy with the management and culture.

I think Greg is the operations guy - following Dave Sokol’s hard core manage by objectives playbook. Basically, Greg is responsible for holding under-performers accountable for getting back on track. Todd is one of the best business analysts on the planet. So he gets to review - and reject - hundreds of deal opportunities a year. And Ajit is the insurance god. I think we’re in good hands.

I voted no, but mostly because $2,000 would require a slightly more optimistic outlook than I’m comfortable with. I’m assuming BV will be around $1,500 per share by the end of 2027, and I believe 1.2x BV ($1,800) is a reasonably conservative multiple for FFH. Now, with that said, given how unpredictable Mr. Market is, and how well FFH has been managing capital in recent years, I do think there’s maybe a 50/50 chance the share price could at least touch the $2,000 per share mark by the end of 2027. So, I’m not a hard no. I just don’t want to set myself up for disappointment.

You would have to chart a few more things to be able to answer your questions. Just looking at per share BV growth, CR and Portfolio return doesn’t tell you enough. For example, you would need to know the share count at the beginning and end of the period. During some periods FFH issues lots of new shares, while other times FFH buys back shares. This impacts per share BV growth. Additionally you would need to chart the premiums written per share and the value of the portfolio per share. The amount of premiums written per share fluctuates widely depending on the underwriting environment. During soft markets FFH will reduce premium volumes to 1x BV or less. But, during hard markets FFH ramps up premium volume to 1.5x BV. So, CR needs to be viewed in relation to the amount of premiums per share during a given time period.

YES. I was just about to say the same thing about return of capital. With so much cash flooding in the door it will be very interesting to watch where they park it. If the stock price continues hovering around book value then if they aren't using excess cash to buy back shares it means they must have REALLY juicy alternatives. I assume the only reason they would park excess cash into ultra-low yielding bonds rather than return capital would be if those bonds allowed them to underwrite additional insurance at extremely favorable rates.

From 2011-2016 5-year treasuries yielded around 1.5%, and the portfolio only yielded 2.3% because of the equity hedges. From 2017-2022 5-year treasuries were extremely volatile, but appear to have averaged around a 1.75% yield. However, the portfolio returned 4.8% thanks to the equities, etc. I think the last decade shows us that a 4.5%+ portfolio return is reasonably achievable even in an environment with sub 2% treasury yields. Therefore, $100+ per share portfolio earnings (after taxes/expenses) seems plenty reasonable 4 years from now and beyond.

Here is a historical chart showing average portfolio returns:

If you want a doomsday scenario where cash and bonds collectively earn less than 1%, and the rest of the portfolio earns less than 8%, you're looking at EPS in the neighborhood of $90 pre-tax. After taxes and overhead/expenses would put it around $40 EPS. Add or subtract what you want for insurance earnings. I'd expect at least $25 to $50 EPS in that type of rate environment.

The investment portfolio will probably be closing in on $70 bil in 3 years. Bonds and cash will probably make up 60% of the portfolio. A blended 4.5% return, or $3.2 bil, should net around $100 per share. If the bonds are only earning 2% then the rest of the portfolio has to earn 8% to maintain the $100 per share bogey. I don’t think that’s too big of a hurdle for the investment team. I also think if interest rates are 2% that it’s not far-fetched to assume sub-100 combined ratios, which should help FFH stay in the neighborhood of $150 EPS through the cycle.

Industrywide beatdown:

If we assume BV grows by $150 per share annually for the next 3 years then depending on which year P/BV hits 1.2x your compound annual return from today's price would be as follows: If P/BV is 1.2x on Dec 31 2024: approx 40% CAGR! If P/BV is 1.2x on Dec 31 2025: approx 26% CAGR If P/BV is 1.2x on Dec 31 2026: approx 21% CAGR Of course, if P/BV is still a sad and lowly 1x BV by Dec 31 2026: approx 14% CAGR And, if P/BV reverts to the 2020 level you're looking at a Dec 31 2026 CAGR of approx 2% (buying opportunity!)

Good news. FFH's Price to Book Value ratio has solidly expanded this year. Here are the numbers (using GAAP for 2020 and 2021). Dec 31, 2020= .71 Dec 31, 2021= .78 Dec 31, 2022= .78 Dec 13, 2023 (Estimate)= 1.0 I have a hunch the strong upward trend isn't going to stop at 1. I'll be surprised if we don't hit 1.2 in the next 2 years. A new baseline of $150+ EPS is especially exciting when you apply a 1.2x multiple and compare the result to today's stock price. #stillCheapAF

Yeah, last I checked Dogecoin still hasn't paid a dividend. And, neither have Beanie Babies or tulips for that matter. Not my kind of asset.

I invested a bit over $200,000 in my side hustle starting in 2012 (which was nearly a third of my net worth at the time). I was able to unload it for a cool 8 figures in 2018. (Thank you everything bubble!) Like Viking mentioned above, I would have NEVER been able to invest that much had my wife and I not been so dang frugal in our 20’s (always trying to put one of our salaries in savings). Also like Viking, my most impactful public equity W was loading up on Fairfax post-2020. It became my first ever seven figure gain on a public equity, which has been fun. And, despite having followed Fairfax since 2010, if not for this board I’m sure I wouldn’t have had the conviction to bet so big.

Yes. I was at my son's basketball game and while he was on the bench I did a super-back-of-the-envelope estimate just to see how much of a per share impact we were actually talking about. Basically just started out with the highest level round numbers: - I gave FFH the benefit of the doubt and assumed a nice round $200 mil earnings potential - Subtracted opportunity cost of, say, $80 mil for what the $2 bil could alternatively earn in treasuries - Took the resulting $120 mil and divided by 23 million shares - Which came out to a little north of $5 per share. So, that's usually enough info for me after a first pass impact assessment, where I just want to quickly understand if we're talking about pennies per share, dollars per share, or tens of dollars per share. You can then go in and add whatever other variables to the mix you want, which would likely pull the estimate down a buck or two, but it's not a level of detail I'm going to worry about.

Back of the envelope, I estimate this will increase the earning power of the bond portfolio by around $5 per share. (I’m assuming less than 2% loss provision, but pulled that out of the air.)

Let me know when they make a billion dollar decision. Anything under $100 mil is noise.

Yes, 15% is possible long term. The magic is in the $2,700 of portfolio investments per share vs $900 per share of book value. You only need to earn 5% to 7% on that investment portfolio to have the kind of ROE you're talking about. Could Warren Buffett earn 5% to 7% on a $60 billion portfolio. 100% guaranteed he could. Can Hamblin Watsa earn 5% to 7% on a $60 billion portfolio? I have a hunch they can going forward.

If FFH earns around $3.5 billion in 2024 as expected, and if the market cap remains around BV, which is approx. $22 billion now, it seems buying back shares is an excellent way to allocate capital. Given FFH knows full well that buying back shares at 1x BV practically guarantees better than 10% EPS growth going forward, if we see FFH deploying cash in ways other than buybacks we should get pretty excited by the relative prospects. 2 favorable scenarios: 1) FFH gets to buy back shares at or below BV, which practically guarantees double digit EPS growth. 2) Mr. Market bids FFH shares up above 1.2x BV and we all get to perceive the joyous wealth-effect of multiple expansion. Though we’ll have to face the anxiety of speculating whether FFH’s investment prospects will still be as good when they no longer have the no-brainer buyback option in their toolkit.

+1

^ here is a post from August where I provided a table with about as conservative of a forecast possible of the earning power of each category in the investment portfolio in 2027. You can see it’s by no means a stretch for the investment portfolio alone to earn $140+ per share. You can then add to that whatever number you want for underwriting earnings (say $0 to $50 per share) and for any opportunistic surprises (like pet insurance subsidiary sales), etc. The most important number is the earning power of the bonds. My table shows a 4% interest rate. I follow the same logic as Leon Cooperman on this front. In a world with at least 2% inflation and 1.5% GDP growth it’s hard to envision a long term scenario where bonds don’t yield at least 4%. Long story short, people worrying about FFH earnings falling off a cliff in 4 years are likely overweighting the significance of underwriting earnings and underweighting the power of a huge investment portfolio that can produce solid earnings per share without any heroics from the FFH investment team.

Maybe they expect 3 or 4 good peak-cycle years to be offset by 3 or 4 trough years. Not an unheard of scenario for FFH historically. (However, I’m in the camp that believes this unusually strong peak-cycle experience for FFH will set it up to take advantage of the trough from a position of strength. But, I have a hunch analysts have little incentive to join our camp.)

Maybe a 1x BV valuation is just another way of saying they don’t have enough reason to expect FFH’s long term ROE to exceed whatever discount rate they’re modeling.