bluedevil

While I am a long-time fan of Tom Gaynor, I have to agree. The biggest contrast that stands out to me is what is going on in the insurance operations between FFH and MKL. I totally get that Gaynor has a different style on equity investments, and i think it is very well explained and i understand and admire it, he is always true to it, and the results have over the long-term been great. But on the insurance side, Fairfax does really seem to be operating at an entirely different level ever since they promoted Andy Barnard to oversee it all. The performance since then has been very consistent and stellar. On the Markel side, they have been talking for some period about the problems but it is hard to get a real sense of what is going on from Tom's letter, and the gentleman running it does not have a long record of success on the insurance side. And what happens to investments after Gaynor, whereas Fairfax seems to have a great succession plan in place. Not saying Markel is not a good stock for the long term, but Fairfax does seem like they are operating at a higher level for the long term.

Excellent letter, as usual. My summary: expect $150 per share in operating earnings per year for each of the next four years, and the insurance companies are kicking ass and taking names.

The prepared remarks from the current conference call team are really terrific. it used to be Prem would give some high level comments and then you would have the CFO give a blizzard of numbers that were already in the written reports. the current team is informative, concise; clear; and nails the high points

Got it, thank you. I think you are right, which is awesome. BX owns 60% and FFH owns 40% of the "true" equity BX owns a large chunk of Class C stock that can be repurchased at an 8% IRR

Can you say more about why Fairfax "effectively" has 40% ownership of Ki? The filings ive seen say that Fairfax owns Class A (20%), while BX owns Class B and Class C (80%), excluding a smaller number of shares for the CEO. See eg the full accounts from 2023. I confess i have not tried to go through the documents with a fine tooth comb, but i haven't seen something that suggests Fairfax enjoys 40% of the economics, nor do i follow why BX being repaid with new shares at the listing price would double Fairfax's economics. Not doubting it, just trying to understand. Personally, I would be very happy if Ki IPOs at a 3 billion valuation, or 3x. Digit -- a very exciting asset -- IPO'd with about 1 billion of premium and IPO'd at a 3bn value.

I believe the upside in Ki is limited by the fact that BX owns most of the equity. Unfortunately, when Ki needed to raise money to launch, Fairfax was capital restrained.

Imagine how valuable BIAL will be in 5 years, when it has expanded to full capacity, and is moving 70 million passengers a year; is connected to the metro system, has expanded highway access, and has a developed real estate campus surrounding the airport that will benefit from this connectivity. And Fairfax India will have 76% of it for about $1.2 billion. A perfect asset for a vehicle like Fairfax India. It requires investors to put in money and not harvest any returns (as it gets re-invested) for a very long time - by 2030, Fairfax India will have been invested about 13 years, and will not have taken out any cash. It probably won't take out any cash until the investment is closer to 20 years old -- after the airport has been fully maxed, based on having two runways, to 90 million or so passengers. But at that point, Fairfax India will have 76% of an extremely valuable asset.

@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

Getting a little worrisome that the regulator has not approved Fairfax going to 74% yet.

Great points, Petec. The fact that this boom in shipping has gone on for so long seems to me to have two big consequences for Atlas (other than its shareholders like me being sad that they missed the boom!): (1) It has greatly lessened the counterparty risk that Atlas faces with the liners, which is a big plus. (2) It has taken a field of competitors that were weak, and made them flush with cash and 3-5 ship lease contracts at very high prices. The vision of Atlas rolling up these weak lessors and consolidating the industry is probably gone, at least in the medium term, and the company is more likely to look to invest in other fields. In terms of the relative attractiveness of the stock, i'm curious in terms of what you see as more attractive. The company will earn about 55% of its market cap by the end of 2024, has an excellent management team, and in 2025 will still have something like 13B of contracted revenue on the books, even if it doesn't book a single new contract until then. In terms of risk/reward, it is hard for me to identify other stocks that are largely indifferent from a revenue/earnings perspective to what happens in the broader economy over the next couple of years and yet still have this kind of earnings yield.

My thoughts on this macro bet: There is no doubt Fairfax's decision to go so heavy on cash is paying off in spades now, and kudos to them. This was not timed to a t though. One would have to go back and reconstruct the history, but Fairfax sat is cash for a good period of time and avoided the upside that other insurers received when interest rates went down and the value of those bonds went up and the interest income. Again, i'm sure it has worked out well now, but the costs of this decision were also being borne for a while. Personally, as i have said before, I would like to see Fairfax transition over time to the Markel style of bond portfolio management. Use active management to get the best yield while maintaining pristine credit quality, but don't try to predict future interest rates. Instead match the bond to when you need to pay out claims, and you hedge your exposure, as Tom Gaynor explained recently (below). I particularly hope they go this route when Brian Bradstreet retires. Fairfax has built a wonderful underwriting machine; and it has great advantages in equity investments because it can take a very long term focus and people want to partner with a friendly, trustworthy source of funds. Those great strengths are beginning to shine through more and more as shorting + acquisitions have stopped. The company is also slowly lowering leverage by growing capital, reducing risk. I think taking away the macro calls on interest rates would be another step in the right direction in the long run. * * * The philosophy on fixed income is that we buy fixed income to match against the reserves of what we expect to pay out in claims and expenses of running the business. And the reason we buy fixed income securities that have a duration of between four years and five years is, because that matches the duration of what we expect to pay out the claims over. So when interest rates rise and you see a mark-to-market decrease in the fixed income portfolio, if you were really doing the net present value of the reserves, you would see an equal and offsetting reduction in the amount of the reserves. Now as an accounting matter, we don’t discount our reserves to their net present value. So economically what we are doing is we are hedging and matching and saying straight up either way because one of the things that we fully believe is that we have no idea how to predict accurately what interest rates are going to do. So either way, whether they go up or whether they go down, we are hedged, we are matched. We are making a spread of return between the positive yields on a bond portfolio and the negative cost of flow that we get through underwriting profitability, and as long as we keep that spread positive number, things add up to the good over time.