bluedevil

@Viking I don’t if you would call it a moat, but one thing that Fairfax has been exceptional at over the past 38 years is knowing the value of its own equity and selling high and buying low. The latest chapter of that was the 2m shares repurchased in late 2021 and the nearly 2m shares of TRS exposure. These have generated about $2.5 billion for the company, but they are just the most recent examples of highly opportunistic moves in Fairfax’s own equity that have juiced the returns on the stock. Many years ago, i sat down and read every shareholder letter up to that point, and one thing that struck me was how much of “the story” this accounted for - including buying scale on the insurance side by issuing stock at 2X or more of book and using it to buy other insurance company’s at below book.

Thank you!

@nwoodman I have not seen any links or postings with the AGM transcript. Is that something you could share? Thanks!

SJ That is right. My baseline view is something like the last five years is most probable in the next 10 years - 97 CR, 5% investment return, leading to 12% book value growth. While in the past Fairfax has not fired on both cylinders at once, I think history very strongly suggests Fairfax will underwrite well - all its subsidiaries have done so after being under Fairfax management for a while, and the go forward plan is organic growth, as it has been for years now. So I think going forward it will more boil down to how well they invest their sizable (and hopefully growing) investment portfolio. Uncertain, but much higher odds of hitting on both if one side of the equation is a consistent performer.

It is surprising to me that the price of Fairfax or Markel has not responded more significantly to the 100bps rise in interest rates (10y) over the past 3 months. The key asset of an insurance company is the ability to collect premiums now and pay them out later. Given this deferral feature is now worth much more, I would have expected more of a reaction.

Not an expert, but i would assume banks hate having to take possession to manage buildings if there are defaults, etc, and that this portfolio will have some defaults. The edge that KW+FFH have is that KW will be able to directly manage any defauls, whereas it would create stress for PacWest. Also gives PacWest liquidity.

Yeah - this seems like a great, opportunistic deal. The key is that if any of these loans default, KW has the expertise to take over and manage, and with the LTVs being modest, have a very good chance of not losing money. Sounds like the loans are going to run off pretty quickly, but should be very nice while it lasts for the next 2 years.

My own thoughts on Markel versus Fairfax, of which i own both. Both have the same essential building blocks for success -- honest management that puts the focus on increasing intrinsic value per share, a very long-term orientation, good insurance operations, and retention of earnings and thoughtful, long-term oriented capital allocation across a large menu of options. I own both because my thesis is these ingredients will produce good results over the long term. Fairfax today trades more cheaply than Markel on a book per share basis, notwithstanding that it has much more float per share which gives Fairfax the potential for higher returns. Seems like the better buy today in my opinion. That said, Fairfax has a lot higher risk tolerance than Markel. I feel quite confident that Markel will compound in high single digits over longer periods of time so long as Gaynor is at the helm. With Fairfax, i think they will do well, but i also think there is a chance they run into troubles, as they have in the past. Some of the uncertainty has been taken out because they are no longer acquiring big insurance companies and hedging, but they still have much higher risk tolerance than Gaynor, on both the equity side and the fixed income side. On equities, Fairfax is adventuresome (Greece, Africa, India, turnarounds, etc.), and they have home runs and they strike out sometimes too. Gaynor looks for long-term compounders based in developed counties, and dollar costs averages into positions. On fixed income, they take no credit risk and duration match. Fairfax has a huge fixed income portfolio and takes big swings with it. Much of it is based on top-down macro outlooks about macro interest rates and marco credit risk that they have (over the full course of time) a good record on, but that are extremely hard to get right consistently in my opinion. It introduces the potential for large outperformance or underperformance. I like having both!

I was not sure I fully got the point Buffett was hinting at on oil. He seemed to be saying that oil was not a bad business now because while it was dependent on the market price of oil, the odds were the price of oil would stay reasonably high. Because if prices dip, then 5m barrels a day of US shale, which has very short lived production, will roll off the market, causing prices to recover. Did others take away the same point?

It seems this is probably due to the bonds maturing in six months - mostly held by Fairfax, and at a very low interest rate. My bet is Fairfax said it was not interested in rolling the debt again.

Another nugget that stuck out to me. Prem does not seem interested in paying down the debt. When asked about it (almost pressed a bit by a SH) he said he thought in the context of Fairfax, it was very manageable given maturity profile and the fact that Fairfax ran its insurance companies separately and could sell one without disruption if it needed to raise capital. Noted that selling Odyssey alone would leave everything ese with no debt. I thought it was a bit dismissive given the level of debt that Fairfax carries, but regardless thought it was clear about what the capital allocation priorities will be going forward. We are going to be seeing Fairfax buy back shares and bring in minority equity interests over the next three years, rather than pay down debt.

It seemed from the AGM that their thesis is that if a recession happens, risk spreads will blow out and if so would intend to extend duration significantly (from 3 years to five or six years) and potentially take on credit risk rather than just being in government bonds, but didn't want to do that at current rates.

Good nugget from Prem's presentation - going on now: They have been working on extending the duration of the bond portfolio, and he is now confident they will earn 1.5 billion in interest and dividends for the next three years - 2023, 2024 and 2025.

I was reading Tom Gaynor's annual letter to Markel shareholders and noted his description of how to value Markel, which is similar to how I have also seen people value Berkshire: One part of the assessment is extremely straightforward. If you assume that we will continue to be profitable in our insurance operations, and we do not shrink, the total value of the investment portfolio accrues to the shareholders. The earnings from our investment portfolio are like fruit from a fruit tree. If you were valuing a fruit tree, the value is the present value of the fruit the tree will produce over time. Same thing with our investment portfolio. As such, we simply take the total value of our investment portfolio and subtract out all debt, to get an indication of the value of the balance sheet part of Markel. Another important part of estimating an indication of the value of Markel stems from the earnings power of our Insurance and Markel Ventures operations. We take the normal, annualized earnings from those operations and multiply that by a consistent and reasonable multiple year-by-year. That process provides an indication of the total value of Markel’s income statement. Then we add those two parts together to determine our own sense of what each share of Markel is worth. Do others here see the balance sheet description as a valid way to measure the value of an insurer that over the long term has demonstrated the ability to underwrite profitably? It seems reasonable to think that Fairfax will be able to underwrite insurance at 100CR over the very long term. Doesn't that mean -- that if you make that one assumption -- that Fairfax should be valued at a market cap of something over $40 billion, versus its market cap today of about $16 billion? i believe the investment portfolio is over $50 billion, and debt is about $6 billion. Curious on people's thoughts on this.

"Brit's growth was driven by Ki, which contributed $834 million to the top line and was up over 100% from the previous year." WOWZA