bluedevil

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.

Agree - this was a point I made earlier that I think is important to understand about Fairfax. Markel, for example, doesn’t speculate with its bond holdings. It forecasts its insurance liabilities, then finds bonds that will come due when the cash is needed for customers (with a margin of safety) and keeps reinvesting the new cash - with an avg 3 year duration. The portfolio is not positioned long or short interest rates. There is exposure to changing rates, but it’s manageable - if rates go up 100 basis points, the bond holdings get marked down (BUT cash remains same bc they hold to maturity) and they reinvest new cash at higher rates. fairfax on other hand often has macro views about the future of interest rates and makes big bets on it, often amplified with options/contracts. At times they have made boat loads of money on these trades, at others they lost boatloads. personally, I don’t think it makes sense to believe that you have an “edge” over the long run betting on the future of interest rates. Fairfax has taken some important steps to reduce risks and let its strengths shine, but I would love for Fairfax to also stop with the macro interest rate calls and reduce overall leverage. that said I do think the current situation is asymmetric. Interest rates have much more room to go up than down, so protecting against a rise is very understandable. But I don’t think this should be how the company operates in the long run. It doesn’t need to do these types of “trades” to make a lot of money.

Question I have (as a shareholder of both the parent and Fairfax India) is why didn't Fairfax India have the opportunity to repurchase these shares, rather than the parent? Fairfax India is buying stock and recently paid $15 a share. Seems that Fairfax India would want to buy back more at $12.

My favorite part: We wrote $23.8 billion in gross premiums in 2021, which is up over $4.8 billion from 2020, essentially all organic. It took us 18 years to reach $4.8 billion. We wrote that in one year in 2021. Congratulations must go to all our presidents who produced this result.

Pretty amazing that GWP increased by $5 billion in 2021. Fairfax Financial paid $4.9 billion for Allied World, at a time when it had GWP of $3 billion per year.

I think on the duration of the bond investing, it is not really about lumpiness. I think it boils down to whether you think you can beat the market on a very macro topic - the future of interest rates. Both the Fairfax and Markel teams share a view that interest rates are too low and that bonds are probably not a great bet here. But Markel chooses not to speculate about when and how they may change. Instead, it tries to underwrite profitably, and takes the most spread it can get by picking and choosing bonds without incurring meaningful credit risk. I believe their view is that determining the future of interest rates is very hard and a field they would rather not play in -- instead they match the duration to when they need the money to pay policyholders. More broadly, i think this greater humility -- for lack of a better word - extends into Markel's thinking on other subjects. FFH over time has gone big in and out of stock positions. Markel is much more of a start small, dollar cost average in over time as you learn more type of style, and if you find something good just stick with it. Fairfax has hit many home runs in their past; but they strike out a lot too. We had "the seven lean years" and then the lost decade. I think FFH's insurance operations are excellent, and they have structurally built an investment program [unconstrained; long-term; permanent capital] that has inherent advantages over the average mutual fund that *should* lead to strong results. The key is to avoid losses that interrupt the progress. I think that can be done by focusing on organic growth [check] and really sharpening the investment program so it plays to FFH's institutional strengths. Being able to invest in private companies in India is a strength; being a permanent home to family-owned businesses in Canada that have businesses that dominate small niches is a potential strength; being able to predict the future of interest rates is not. I think they need to eliminate the bets on things where they don't have a clear edge.

The more years I follow Markel and Fairfax, there more I think some of the way Markel does many things is superior and would hope Fairfax would adopt it as well. One is bond investing. Markel doesn’t try to predict future interest rates. Instead it matches its bond duration to its insurance liabilities, and is careful as it can be not to incur credit risk by careful investing in top tier debt. Fairfax can hit more home runs by trying to time big moves in and out of cash versus the bond market, but that’s a very hard game for anyone - even a legend like Brian. Almost like shorting. Similarly, with private investments, Markel looks for very specific, clearly defined targets: firms that are market leaders in very niche fields: truck flooring; artificial plants; heavy cranes; and so on. It’s a field where they have specific competitive advantages. Far better defined than FFH’s strategy, and it has been very successful. I think FFH has already made some critical pivots that have made the business a stronger more durable one - for example, end to shorting, focus on organic growth in insurance. I think it could benefit from a couple more…

There is a very good gaming company available for cheap these days — Tencent

There is a lot of speculation and frenzy around the various crypto tokens. But as to Bitcoin - I think Miller and Saylor have very well reasoned arguments why it is a digital and far more advantageous replacement for gold.

I was thinking today about Prem Watsa's comment on the 3Q 2020 earnings call. Since then, Root insurance is down 90%, while Fairfax has almost doubled. Zoom has lost 62%, and Exxon has doubled. I hope this continues, versus the "confidence termites" taking out every one! * * * Let me just tell you, I've been in the business for 45 years. And I have rarely seen a time period where there's such a divergence from growth-oriented stocks like technology and value-oriented stocks. So, I gave you a few examples in our own portfolio. But let me just give you one that I just came across today. I just looked it up. I looked at it again. Zoom, which we all use Zoom Technology, Zoom video. It's got a market cap of $139 billion. At the end of July, for the first six months, it had a revenue base of approximately $1 billion and a net profit of $200 million. $139 billion that by the way, is about the same size as Exxon. So, we have this situation him where if you're growth oriented and it's growing significantly. And that you have market capitalizations that we haven't seen. And it can only be justified for a short period of time in the stock market. In the insurance business, and I don't follow this too much. And just know that insurance was a few days ago. Root went public, company called Root $7 billion. It's got $500 million of the premium. And it's $7 billion market cap is almost as big as Fairfax, which has $20 billion of approximately $20 billion of premium. Like exceptional divergence. And I've seen this over long periods of time. And it reminds me really of the late 60s and the early 70s when you had the Nifty 50.

Ki is a bit of a sad chapter to me. The massive money injection from Blackstone was seemingly necessitated because Fairfax couldn’t fund it during pandemic and liquidity issues, so now Blackstone has most of the upside. But hopefully the real upside is doing similar things that Ki and Digit are doing across all of Fairfax’s insurance subsidiaries.