glider3834

+1 agree - I think they will continue use available cash to buyback stock & future large insurance acquisitions are unlikely

on share issues - its all about the economic value added from the share issue that is important & not the issue itself. Here is Prem quote From Fairfax Annual report 2017 Over our history, we have issued 29.5 million shares as we expanded Fairfax from net premiums written of $10 million to $10 billion (current run rate of $11.5 billion). During this period, we have also reduced our shares outstanding by 6.7 million, for a net increase of 22.8 million. As the table below shows, our shares outstanding have grown by 5.6x while net premiums written, investments and common equity have increased by 1,000x or more. Henry Singleton, at Teledyne, reversed this trend, as you know, and over the next ten years we expect to do the same – use our free cash flow to buy back our shares! on TRS - Viking has correctly identified that they are in a position to influence the TRS outcome which is important - the size of the TRS position is really large & I think this could turn into one of the best investments they make over the next 6 mths given the discounted level where FFH shares are trading - lets see how we go;)

Just checked - interesting stat - Allied world GWP was around $3bil in 2017 & it looks like Allied GWP is around $3 bil for just the first 6 mths of 2021!

I think a 'permanent discount' is reasonable to apply if results are consistently poor & that applies to any listed company. But if Fairfax keep delivering great results, then share price will eventually start to close that gap with fair value IMO I think its a waiting game now as analysts, investors digest their results & start to adjust their fair value estimates and act accordingly (see recent analyst upgrades!). On top of this you have retail investors, hedge funds that won't even touch a stock if the technical indicators are poor or they cannot see enough momentum in the share price. So IMO it tends to be the value investors who jump on board first and then the technical investors who wait for the water to get warm before they jump aboard as well.

What a great result - 27% growth in GWP and 94% CR immediately stood out - quarterly operating result for insurance & reinsurance looks to be a record I believe at$398 mil - we are only half way through the year but still excellent progress so far. The non-insurance operating result has a lot more room to improve too as we continue covid-19 vaccination effort provided the economic recovery stays on track, so I think when looking at normalised operating earnings potential for Fairfax there is still appears to be a lot of scope for growth. Great to see even a small buyback of $63 mil in 2Q '21 hopefully that will continue

I would just add to Sanjeev's points that changes in the market values of Fairfax's non-insurance investments in associates & consolidated subs are not being captured by book value, so book value needs to be adjusted IMO if you want to measure Fairfax's intrinsic value. In Q1 2021, the mark to market movement of these non-insurance investments increased by $1.1 bil. Some of these significant non-insurance investments have been directly affected by Covid-19 & re-opening restrictions - Bangalore Airport, Thomas Cook India, Recipe etc - so operating earnings should improve as vaccination drive heats up.

no worries nwoodman I was going to write a response but I think this article sums up some key insights into Digit's potential growth in health insurance. https://kr-asia.com/how-insurtech-startups-in-india-are-increasing-insurance-penetration-in-the-country Here are a few quotes On health insurance In the first half of FY 2020-21, health insurance premiums occupied the top spot in the non-life insurance segment for the first time in India, according to the General Industry Council. “When the world was hit with the novel coronavirus, the fear of hospital bills and losing an earning family member to the virus hit the roof. And so did the need to get health protection,” Vivek Chaturvedi, chief marketing officer of Digit Insurance said. A survey conducted by insurance provider Max Bupa last year said there has been a significant shift in the consumer mindset regarding the importance of health insurance coverage. The survey found that 71% of respondents considered health insurance necessary after the pandemic hit the country, compared to just 10% interested in getting insurance before the pandemic. Also here is another older article which I think you will find interesting https://yourstory.com/2018/05/rs-350-cr-investment-within-6-months-operations-digit-plans-take-prime-spot/amp Here are a couple of quotes On customer experience “The insurance industry has seen lots of changes in the last 15 years in India. Unlike other sectors, we have not seen insurance companies redefining the customer experience. Further, only 29 percent of insurance customers are satisfied with their current providers, and we hope to change that.” (Kamesh Goyal) On hiring team The company made sure it hired employees not only from the insurance, but from non-insurance backgrounds such as ecommerce, consulting, and technology, among others. In fact, around 53 percent of Digit’s team is from the non-insurance background.

I haven't had a chance to take a look but looks like a very solid result - also I saw this article which shows an overlap between WRB & Fairfax's businesses - looks like both WRB & Fairfax rank as 4th & 5th largest players the US E&S market based on Q1 2021 DWP , as WRB wrote 630 mil & Fairfax wrote 625 mil in E&S DWP according to SPG global report https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/insurers-log-big-q1-premium-growth-in-increasingly-important-us-e-s-market-65140072 Here are some comments Broker Ryan Specialty, which placed 70.6% of its total premiums in the E&S market in 2020, said in an IPO filing that the "emergence of complex, unique or otherwise hard-to-place risks," as well as the need for specialist solutions, has driven meaningful growth within what it described as the "increasingly important" U.S. E&S market.

I honestly felt the same way as Prem when I saw the number on this one, but I can see now that for FB it was a strategic move to protect their own business (WA had 450 mil users at the time & higher level of user engagement than FB) - so it was strategically important and they saw potential I am sure to grow the functionality & monetise over time. But was it worth $19 bil? Maybe you could make the case based on $s per user but I suspect MZ really just wanted to seal the deal - it was probably worth more to FB than anyone else. I think you will see a lot more on monetisation front with Whatsapp for Business over next few years - saw this recently https://www.socialmediatoday.com/news/facebook-announces-the-next-stage-of-its-ecommerce-push-including-shops-on/602239/

Really good discussion guys. I think I read WB saying something along these lines & it probably describes any personal relationship or marriage too as well but essentially don't expect to find a perfect partner (in Fairfax) you have to accept (& embrace) their imperfections. Fairfax might miss the next Amazon because they are valuation conscious, however, based on their 35 year track record they are also not going to blow up the company How? because they are constantly worried about the downside risk & having a margin of safety. This is a consistent theme to their investment approach - if you read all of Prem's 35 shareholder letters, the way they structure their investments is intelligent. They generally want to lead with debt, convertibles &/or warrants & then maybe hold a smaller equity component - Why? because they want to limit the downside but still preserve benefit of the upside. They also want to pay no more than 10x free cash flow. If you look at their investment in Blackberry, more than half their investment is sitting in convertible debt - protect the downside! The other point I want to make is that when you have a valuation obsessed focus, sometimes you can absolutely hit the ball out of the park - look at Digit (albeit early days!) It sums up their investment approach 1. Bet on management (Kamesh Goyal extremely talented insurance CEO in India with a track record) 2. focus on margin of safety (they spent around 150 mil for a stake now worth close to $2.3 bil) 3. Leveraged their deep understanding of insurance, the Indian market & their understanding of how digitalisation is transforming insurance industry (see also their investment in Ki via Brit). Now the imperfections - I would have liked to see them peel back on some of their more cyclical investments (RFP, Stelco) & I have raised this before - unfortunately lumber prices have fallen (demand destruction!) considerably since May & RFP share price is down a lot since then. On debt - I agree they need to complete the Riverstone deal which hopefully will happen soon (has been approved by EU so no anti-competition issues here) & improve their capital position. Its also important to understand that the debt for the non-insurance subs is non-recourse to Fairfax.

Fairfax have been sitting on their position with BB (no insider sales that I can see as yet)-maybe they want to see how the development & monetisation of Ivy plays out - product is due to ship in Feb-22. Blackberry Ivy is really interesting and could have huge potential but they need to execute - its too early to say but maybe there will be greater visibility over the next 6 months

Excellent summary Viking

I meant to say 'potential appreciation from the listing of BIAL & other privately owned investments'

Yes Viking definitely a lot of positive catalysts for Fairfax India and FFH is carrying their position in Fairfax India at around $9.66 per share (at 31 Dec-20) which looks to be close to 50% of Fairfax India's book value if it is around $18-19 which does not even capture potential appreciation from BIAL & other privately owned investments. With BIAL, I suspect they will be patient with the IPO & they have said it will be IPO'd subject to 'market conditions'. Hopefully they can increase their stake in BIAL by bidding for the govt stake & then deferring the listing at least until covid situation (3rd wave) settles down. THat would then set the stage for hopefully a successful IPO and also reduce any risk of OMERS exercising their ratchet clause.

impeccable timing thats for sure with this IPO

some interesting insights thanks guys and a consensus I think that hard market is moderating - I would also agree with Viking comment below

Agreed petec From Q1 2021, we can see float grew 13.9% YoY Float of the insurance and reinsurance operations increased by 13.9% to $23,244.2 million at March 31, 2021 from $20,413.6 million at March 31, 2020. https://www.fairfax.ca/news/press-releases/press-release-details/2021/Fairfax-Financial-Holdings-Limited-Financial-Results-for-the-First-Quarter/default.aspx By my calcs, based on 26 mil shares outstanding, at Q1 2021 we have float per share of around USD 894 (CAD 1118) Current share price around CAD $547 So you are getting $2 float for each $ 1 share which gives some pretty nice investment leverage at the current share price (also thats a higher ratio than historically for FFH, which I think also supports argument FFH is undervalued currently IMO!)

sorry I meant to say its one of the contributing factors cheers

Article on Seeking Alpha today: https://seekingalpha.com/article/4438293-digit-capital-raise-highlights-fairfax-financials-attractive-valuation?mail_subject=frfhf-digit-capital-raise-highlights-fairfax-financial-s-attractive-valuation&utm_campaign=rta-stock-article&utm_content=link-0&utm_medium=email&utm_source=seeking_alpha Edited 14 hours ago by cwericb Sorry, this should have probably been posted on the Fairfax 2021 thread I liked this article but I have a different take (please note numbers below are my own but please do your own due diligence thanks) I didn't agree with author's view that 9% compounded growth in book value is a base line going forward for Fairfax & author is using BV growth that was reported over 2017-2020 as well with 2020 a far from normal year. During 2017-2020, the combined ratio ran close to 100% averaged over those years (due to 2017 largely - see below), so if we use 9% as a base rate like author then we are also assuming that combined ratio will average 100% going forward. But is that realistic for Fairfax for insurance & reinsurance ops based on the current environment (hard market) & historical results - see below 2011-2016 - Avg CR 96% It hit 107% in 2017 (hit a speed bump due to acquiring Allied World, reporting large catastrophe losses which were based on only 6 months of premiums which magnified the loss ratio - without Allied World combined for Fairfax was 100.9) 2018-2020 (including COVID) - Avg CR 97% Q1 2021 - CR 96% So based on above, I would expect UWP to contribute meaningfully to operating earnings - I know Prem has set a target of 95% CR as a target in shareholder letter, so they believe they can achieve solid underwriting profitability over time. If we take earned premium in Q1 2021 & I am going to be really simplistic (probably will get into trouble here as ignoring renewal timings etc but lets annualise earned premium in Q1 2021 of 3,730 by simply multiplying it by 4 = 14,920 mil Then lets apply 97% CR (bit more conservative than Q1 2021) so we get UWP = 450 mil (rounding up for simplicity!) So author is saying UWP will be zero & I would say it could be closer to 450 mil for 2021 - in a nutshell, hard market (higher pricing plus incentive to drive insurance cost efficiency) can provide a counter-weight to lower interest income for Fairfax (also the hard market is also arguably being driven by lower interest rates) Of course, higher interest rates will be enormously beneficial to Fairfax's fixed income returns but my counter-argument to this author & I mean it in most respectable way but there are other ways to get to the finishing line (ie double digit BV growth) and underwriting profits are one of them. Interested to know what everyone else thinks too as always

It all comes down to level of fiscal & monetary stimulus which has been extremely accomodative - I think there are definitely speculative parts to the market that I am avoiding right now but picking if we will have a general (versus sector or stock-specific) market correction in the near term or where interest rates are going to be (in 1 year or 2 years) is impossible in my view. I like to keep it simple & easy - own concentrated equity positions - dig deep, understand why they are undervalued and what the investment case is? I remember in 2012 I thought the market had run too far too fast & lost a lot of money hedging, I remember eventually swapping money losing S&P hedges for shares including Citigroup at $27 a share. I am not going to go back there for another round trip.

looks to be held through Fairfax Asia - check out FFH 2020 AR

+1!

re Scotia comment '10% discount to book value' - looks to be based on BV at 31 Mar-21 (circa CAD 620) versus current share price (circa CAD 560) appears to exclude "expected investment gains on Digit in Q3/21, we also expect sizeable investment gains from FFH’s equity portfolio in Q2/21, along with a notable increase in the fair value of its non-insurance consolidated investments and investments in associates that do not get reflected in its book value due to their accounting treatment.”

Two more analyst upgrades for Fairfax https://www.theglobeandmail.com/investing/markets/inside-the-market/article-tuesdays-analyst-upgrades-and-downgrades-167/ Scotia analyst Phil Hardie jacked up his one-year price forecast for shares in Fairfax Financial Holdings Ltd (FFH-T) after its Indian digital insurance subsidiary, Digit, announced an equity financing agreement that values the investment at $3.5-billion. The transaction is expected to result in an increase of $1.8-billion, or $61 per share, in the value of Fairfax’s stake. “This development further underpins our thesis that 2021 is going to be a big year for Fairfax, as it benefits from both, a virtuous cycle in its insurance business, and what is likely to remain a favourable environment for value investing,” Mr. Hardie said in a note. “Aside from the expected investment gains on Digit in Q3/21, we also expect sizeable investment gains from FFH’s equity portfolio in Q2/21, along with a notable increase in the fair value of its non-insurance consolidated investments and investments in associates that do not get reflected in its book value due to their accounting treatment.” “We believe valuation remains attractive, with the stock trading at a 34% discount to its closest peers and at a roughly 10% discount to book value,” he added. Mr. Hardie raised his price target on Fairfax to C$780 from C$685. He reiterated a “sector outperform” rating. While more conservative in its forecasts, BMO also raised its price target in light of the transaction, to C$650 (from C$600). The average analyst target is $696.07.

Agreed Another way of looking at the Fairfax's valuation is also comparing the GPW/NPW to the market cap & that is also well down - take a look at price/sales ratio which is sitting at 0.57 versus 0.83 over the last 5 years according to morningstar https://www.morningstar.ca/ca/report/stocks/valuation.aspx?t=0P00006821&lang=en-CA Considering the high quality & very profitable insurance business that Fairfax has built, that is surprising. Even with margin pressure from lower interest rates & I think Fairfax are more than combating this issue with higher investment gains now from their equity portfolio, dividends, monetising investments through IPOs(still potentially more to come in 2021) and post-covid bounce in their non-insurance subs. Also with double digit growth in premium in Q1 2021 and if that continues through 2021 which seems a good bet, then Fairfax will effectively be adding the equivalent of another insurance company acquisition in terms of premium growth. There has definitely been a negative perception around the investment performance of Prem & Co over the last number of years, which I attribute in large part to their macro call to short/hedge their portfolio & that has supported the bear thesis which in turn has depressed the share price. Big wins like this one with Digit are one way to chip away at that negative perception. Lets face it, 35 years at 18.7% compounded growth in book value is no fluke , 2021 might see that compounded return lift even higher. I believe that if you take out the $5bil of losses from shorting (not to mention the opportunity cost from doing this), Fairfax's investment results were ok and then perhaps if you combine that with potentially a blow out year in 2021, with hopefully a 20% or greater jump in book value and all of a sudden you potentially get a game changer & shift in investor perception and a re-rating hopefully of Fairfax's valuation. Also I think part of bear thesis is perception that Fairfax is an old school, value company whereas everyone wants to be invested in tech, but suddenly in just 4 years here we are with a $2.3 billion investment in a fast growing insurtech (Digit) (nearly 20% of Fairfax's market cap) & there still appears to be enormous scope for potential growth for Digit in India (& globally ??). Anyway there are my rambling thoughts.. we are still only halfway through 2021... but I agree with you Viking & others that it is looking promising for Fairfax so far.