Fairfax 2020

[StevieV]

FFH average EPS:

 

- 2005 to 2009: $33

- 2010 to 2014: $17

- 2015 to 2019: $28

 

- 15 year average EPS: $26

 

Still under the same management.

 

....

 

Is this supposed to be supportive of the bull case?  Doesn't look that way to me.

[bizaro86]

I appreciate the kind words. How great or terrible I am of course depends on who you ask!

 

Joking aside.

 

I think the point being missed is that when something isnt working, a market participant who is looking to make money needs to ask themselves why? Relentlessly. I hate group think and find great value in the other side of the story, even when its contrary to what I think. Its why many times(like TPL thread for instance) people may call it "trolling" or whatever. Who cares what they call it. But I find that knowing the other side of the investment is more useful to me than loving my own thesis. So with this said, the problem you run into with some of these guys, is they have weeks, months, years of data points conveying that something is not working. And outside of just being arrogant, I cant really see any other justification for being so cavalier about it. One of the biggest flaws I routinely find in the "value investor handbook" is that there are plenty of aphorisms and excerpts that repeatedly reinforce bad behaviors and habits. No one says Prem needed to buy Tesla. But if he was honing in on Blackberry, was something like Apple really too far out of his universe? I use Apple because its a direct comp to the observation made by another poster about Buffett, who has fully admitted he doesnt know shit about tech.

 

If Fairfax had bought Apple instead of Blackberry all those years ago, articles about WEB innthe Canadian press would start with the sentence,  "the Prem Watsa of the USA."

 

Interesting how big a difference one decision can make.

[Parsad]

<Third, you use Greg's comments about adapting.  Unlike public corporations and public money managers, their records are exactly that...public.  Greg may be full of shit and hasn't outperformed anyone other than Dane Cook.  No offense Greg...just saying! >

 

Kind of a cheap shot, Sanjeev. Greg posts real-time buys and sells here, with good - to - great results. His thought process is well-documented. I have little doubt he's got a good track record.

 

Hi Libs,

 

You did see the smiley face after the sentence, correct?  It meant as a joke between me and Greg.  Cheers!

[Parsad]

FFH average EPS:

 

- 2005 to 2009: $33

- 2010 to 2014: $17

- 2015 to 2019: $28

 

- 15 year average EPS: $26

 

Still under the same management.

 

Actually generates earnings over time and pays consistent dividends! (Not a money losing unicorn. Not a negative yielding bond.)

 

Was recently selling for less than 10x very long term historical average earnings.

 

Current price is slightly above where the CEO was willing to buy $150 million more.

 

Unfortunately, it feels like bitterness from those who bought into the hype of 2005 to 2009 - paying close to $400 per share - is clouding a lot of judgment about the opportunities/risks presented today. People seem to want to vent frustration, while it seems a perfectly prudent investment is right in front of us.

 

Maybe there should be a “Vent frustration with Prem” thread to provide therapy and isolate emotionally charged frustrations. Maybe a “Show love for Prem” thread too for balance. Haha.

 

Haha!  +1!  Maybe you are right.  The only CEO I've seen as much love and hate for, constantly flipping back and forth, is Elon Musk.  And presently, everyone loves him!  Cheers!

[Parsad]

FFH average EPS:

 

- 2005 to 2009: $33

- 2010 to 2014: $17

- 2015 to 2019: $28

 

- 15 year average EPS: $26

 

Still under the same management.

 

....

 

Is this supposed to be supportive of the bull case?  Doesn't look that way to me.

 

12% ROE gives you a $70 per share net profit...that's today...gives you a 10 times multiple of around $700 per share or 1.2 times book.  If they compound at 12-15% ROE for the next 15 years...what would you say is fair value for that business  on a per share basis?  From a price of $430 CDN today.  Cheers!

[StevieV]

FFH average EPS:

 

- 2005 to 2009: $33

- 2010 to 2014: $17

- 2015 to 2019: $28

 

- 15 year average EPS: $26

 

Still under the same management.

 

....

 

Is this supposed to be supportive of the bull case?  Doesn't look that way to me.

 

12% ROE gives you a $70 per share net profit...that's today...gives you a 10 times multiple of around $700 per share or 1.2 times book.  If they compound at 12-15% ROE for the next 15 years...what would you say is fair value for that business  on a per share basis?  From a price of $430 CDN today.  Cheers!

 

The chart I quoted showed that the EPS in the 5-year range from 2005-2009 was greater than the EPS a decade later during the 5-year stretch from 2015-2019.  An earnings/share decline over 10 years isn't bullish in my book.

 

You give the bull case - that they'll today generate good profits.  I haven't verified your numbers or Thrifty's, but your estimate is double the recent past EPS given by Thrifty.  Sure, if they now start producing double the EPS, the shares should be worth a lot more.  Of course.

 

Fairfax hasn't had a problem projecting gains (15% in fact).  It has had a problem avoiding stumbles so that they actually achieve them. 

[Parsad]

FFH average EPS:

 

- 2005 to 2009: $33

- 2010 to 2014: $17

- 2015 to 2019: $28

 

- 15 year average EPS: $26

 

Still under the same management.

 

....

 

Is this supposed to be supportive of the bull case?  Doesn't look that way to me.

 

12% ROE gives you a $70 per share net profit...that's today...gives you a 10 times multiple of around $700 per share or 1.2 times book.  If they compound at 12-15% ROE for the next 15 years...what would you say is fair value for that business  on a per share basis?  From a price of $430 CDN today.  Cheers!

 

The chart I quoted showed that the EPS in the 5-year range from 2005-2009 was greater than the EPS a decade later during the 5-year stretch from 2015-2019.  An earnings/share decline over 10 years isn't bullish in my book.

 

You give the bull case - that they'll today generate good profits.  I haven't verified your numbers or Thrifty's, but your estimate is double the recent past EPS given by Thrifty.  Sure, if they now start producing double the EPS, the shares should be worth a lot more.  Of course.

 

Fairfax hasn't had a problem projecting gains (15% in fact).  It has had a problem avoiding stumbles so that they actually achieve them.

 

Sure.  I agree with you.  But if they have somehow learned from their mistakes (a great deal of which was being too conservative and macro-based), would an investor supposition that the numbers I provided above are relatively realistic?  I believe so.  Cheers!

[Parsad]

Also, one thing Thrifty didn't show, was that FFH's earnings in the last three years (2017-2019) was roughly $63 CDN per share...$64.98 USD in 2017, $11.65 USD in 2018 and $69.79 USD in 2019.  That's about 11% ROE over those three years. 

 

I think if Fairfax keeps things simple...focus on strong, growing, conscientious insurance businesses...a diversified portfolio of quality bonds (not going to second guess whatever Brian does) and undervalued, quality stocks...complemented by quality, wholly owned businesses.  With their leverage and acumen, if they just do that, they'll hit 15% ROE long-term.  Keep it simple Prem!  Cheers!

[StubbleJumper]

Also, one thing Thrifty didn't show, was that FFH's earnings in the last three years (2017-2019) was roughly $63 CDN per share...$64.98 USD in 2017, $11.65 USD in 2018 and $69.79 USD in 2019.  That's about 11% ROE over those three years. 

 

I think if Fairfax keeps things simple...focus on strong, growing, conscientious insurance businesses...a diversified portfolio of quality bonds (not going to second guess whatever Brian does) and undervalued, quality stocks...complemented by quality, wholly owned businesses.  With their leverage and acumen, if they just do that, they'll hit 15% ROE long-term.  Keep it simple Prem!  Cheers!

 

 

Sanj,

 

You need to go back to the posts in approximately February in this thread where we noted that earnings in the past three years have been characterized by a quality problem.  It's all fine and good to note that FFH had a 11% ROE in those years, but then you should probably qualify that statement by noting that a good chunk of that consisted of paper gains (ie, marking the airport to market last December, merging Grivalia and Eurobank, Thomas Cook/Quess etc).  FFH management should be given full credit for having created value in all three of those companies, but the value was created long before the paper gains were booked.  Thrifty's table, while depressing, is a long enough period to smooth out those lumpy transactions.

 

 

SJ

[Parsad]

Also, one thing Thrifty didn't show, was that FFH's earnings in the last three years (2017-2019) was roughly $63 CDN per share...$64.98 USD in 2017, $11.65 USD in 2018 and $69.79 USD in 2019.  That's about 11% ROE over those three years. 

 

I think if Fairfax keeps things simple...focus on strong, growing, conscientious insurance businesses...a diversified portfolio of quality bonds (not going to second guess whatever Brian does) and undervalued, quality stocks...complemented by quality, wholly owned businesses.  With their leverage and acumen, if they just do that, they'll hit 15% ROE long-term.  Keep it simple Prem!  Cheers!

 

 

Sanj,

 

You need to go back to the posts in approximately February in this thread where we noted that earnings in the past three years have been characterized by a quality problem.  It's all fine and good to note that FFH had a 11% ROE in those years, but then you should probably qualify that statement by noting that a good chunk of that consisted of paper gains (ie, marking the airport to market last December, merging Grivalia and Eurobank, Thomas Cook/Quess etc).  FFH management should be given full credit for having created value in all three of those companies, but the value was created long before the paper gains were booked.  Thrifty's table, while depressing, is a long enough period to smooth out those lumpy transactions.

 

 

SJ

 

Hi Stubble, you are correct, but that cuts both ways.  You have to also assume that Fairfax's insurance businesses are worth a heck of a lot more than they are carried for in their books.  In other words, you could assume that book value per share may be closer to $625-650 USD in reality.  So you can't take away growth in book value on one hand and not give credit on the other hand.

 

I'm the first one to say that Fairfax has underperformed over the last 10 years.  That doesn't mean that the next ten years are going to be the same.  I'm buying at today's prices essentially after the pandemic at $380-430 CDN...not two years ago at $650 CDN per share.  I never owned BAC until it fell to $5 in 2008/2009...I still own most of those BAC shares...ten years later.  I'm not looking in the rearview mirror when I invest...I'm always...ALWAYS...looking forward!  Cheers!

[bearprowler6]

Also, one thing Thrifty didn't show, was that FFH's earnings in the last three years (2017-2019) was roughly $63 CDN per share...$64.98 USD in 2017, $11.65 USD in 2018 and $69.79 USD in 2019.  That's about 11% ROE over those three years. 

 

I think if Fairfax keeps things simple...focus on strong, growing, conscientious insurance businesses...a diversified portfolio of quality bonds (not going to second guess whatever Brian does) and undervalued, quality stocks...complemented by quality, wholly owned businesses.  With their leverage and acumen, if they just do that, they'll hit 15% ROE long-term.  Keep it simple Prem!  Cheers!

 

I honestly cant see how you can make these statements?

 

Interest rates are at all time lows---unless of course rates go negative in the US? A clear head wind for any insurance company even if Brian B is making the calls on duration and quality.

 

Quality stocks---we are talking about Fairfax aren't we?

 

And I would love to get your feedback on the comments attributed to Prem in the recent G&M article. Has Fairfax closed out all its shorts? Have the comments attributed to Prem in the article left him with enough wiggle room to short again in the future?

 

 

 

 

[StubbleJumper]

Also, one thing Thrifty didn't show, was that FFH's earnings in the last three years (2017-2019) was roughly $63 CDN per share...$64.98 USD in 2017, $11.65 USD in 2018 and $69.79 USD in 2019.  That's about 11% ROE over those three years. 

 

I think if Fairfax keeps things simple...focus on strong, growing, conscientious insurance businesses...a diversified portfolio of quality bonds (not going to second guess whatever Brian does) and undervalued, quality stocks...complemented by quality, wholly owned businesses.  With their leverage and acumen, if they just do that, they'll hit 15% ROE long-term.  Keep it simple Prem!  Cheers!

 

 

Sanj,

 

You need to go back to the posts in approximately February in this thread where we noted that earnings in the past three years have been characterized by a quality problem.  It's all fine and good to note that FFH had a 11% ROE in those years, but then you should probably qualify that statement by noting that a good chunk of that consisted of paper gains (ie, marking the airport to market last December, merging Grivalia and Eurobank, Thomas Cook/Quess etc).  FFH management should be given full credit for having created value in all three of those companies, but the value was created long before the paper gains were booked.  Thrifty's table, while depressing, is a long enough period to smooth out those lumpy transactions.

 

 

SJ

 

Hi Stubble, you are correct, but that cuts both ways.  You have to also assume that Fairfax's insurance businesses are worth a heck of a lot more than they are carried for in their books.  In other words, you could assume that book value per share may be closer to $625-650 USD in reality.  So you can't take away growth in book value on one hand and not give credit on the other hand.

 

I'm the first one to say that Fairfax has underperformed over the last 10 years.  That doesn't mean that the next ten years are going to be the same.  I'm buying at today's prices essentially after the pandemic at $380-430 CDN...not two years ago at $650 CDN per share.  I never owned BAC until it fell to $5 in 2008/2009...I still own most of those BAC shares...ten years later.  I'm not looking in the rearview mirror when I invest...I'm always...ALWAYS...looking forward!  Cheers!

 

 

Sanj,

 

You are suggesting that FFH is worth ~1.4x or 1.5xBV.  I might actually believe 1.2x, because most of the value is in the insurance subs.  There's really only about three ways that the insurance subs would be worth much more than book:

 

1) The subs' underwriting results are so spectacular that their ROE is high enough to merit a multiple;

2) Hamblin-Watsa's investment results are so spectacular that the subs' ROE is high enough to merit a multiple;

3) There is a "hidden" asset that is carried on the books for less than BV.

 

 

So, in your view, which of those three is currently the driver of a 1.4x or 1.5x multiple?  I don't doubt that the market will swing and FFH will eventually become overvalued again and might *trade* at some ridiculous level, but we are talking about value, not market bullshit, right?

 

 

SJ

[Parsad]

Also, one thing Thrifty didn't show, was that FFH's earnings in the last three years (2017-2019) was roughly $63 CDN per share...$64.98 USD in 2017, $11.65 USD in 2018 and $69.79 USD in 2019.  That's about 11% ROE over those three years. 

 

I think if Fairfax keeps things simple...focus on strong, growing, conscientious insurance businesses...a diversified portfolio of quality bonds (not going to second guess whatever Brian does) and undervalued, quality stocks...complemented by quality, wholly owned businesses.  With their leverage and acumen, if they just do that, they'll hit 15% ROE long-term.  Keep it simple Prem!  Cheers!

 

 

Sanj,

 

You need to go back to the posts in approximately February in this thread where we noted that earnings in the past three years have been characterized by a quality problem.  It's all fine and good to note that FFH had a 11% ROE in those years, but then you should probably qualify that statement by noting that a good chunk of that consisted of paper gains (ie, marking the airport to market last December, merging Grivalia and Eurobank, Thomas Cook/Quess etc).  FFH management should be given full credit for having created value in all three of those companies, but the value was created long before the paper gains were booked.  Thrifty's table, while depressing, is a long enough period to smooth out those lumpy transactions.

 

 

SJ

 

Hi Stubble, you are correct, but that cuts both ways.  You have to also assume that Fairfax's insurance businesses are worth a heck of a lot more than they are carried for in their books.  In other words, you could assume that book value per share may be closer to $625-650 USD in reality.  So you can't take away growth in book value on one hand and not give credit on the other hand.

 

I'm the first one to say that Fairfax has underperformed over the last 10 years.  That doesn't mean that the next ten years are going to be the same.  I'm buying at today's prices essentially after the pandemic at $380-430 CDN...not two years ago at $650 CDN per share.  I never owned BAC until it fell to $5 in 2008/2009...I still own most of those BAC shares...ten years later.  I'm not looking in the rearview mirror when I invest...I'm always...ALWAYS...looking forward!  Cheers!

 

 

Sanj,

 

You are suggesting that FFH is worth ~1.4x or 1.5xBV.  I might actually believe 1.2x, because most of the value is in the insurance subs.  There's really only about three ways that the insurance subs would be worth much more than book:

 

1) The subs' underwriting results are so spectacular that their ROE is high enough to merit a multiple;

2) Hamblin-Watsa's investment results are so spectacular that the subs' ROE is high enough to merit a multiple;

3) There is a "hidden" asset that is carried on the books for less than BV.

 

 

So, in your view, which of those three is currently the driver of a 1.4x or 1.5x multiple?  I don't doubt that the market will swing and FFH will eventually become overvalued again and might *trade* at some ridiculous level, but we are talking about value, not market bullshit, right?

 

 

SJ

 

Hi Stubble,

 

No I'm saying that Fairfax is worth 1.1 times.  My numbers are based on book today being back close to where it was at year-end 2019...around $486 USD...or about $610 CDN at 1.25 exchange.  1.1 times $610 CDN gives around $670 CDN per share.  And as you know, it's trading around $430 CDN.  Just getting back to fair value would be a 55% gain. 

 

In regards to the value of the insurance businesses, I was simply pointing out that if you say they benefitted in recent years from the realized value of certain assets, then you have to give some unrealized value to other assets, including insurance.  What was Fairfax Asia carried as on the books...what was the total realized sale price?  What about Riverstone Europe?  You are at zero interest rates...you don't think other insurers will pay up for Fairfax insurance assets?  Especially now that they are operating so well for nearly a decade?  Cheers!

[Parsad]

Also, one thing Thrifty didn't show, was that FFH's earnings in the last three years (2017-2019) was roughly $63 CDN per share...$64.98 USD in 2017, $11.65 USD in 2018 and $69.79 USD in 2019.  That's about 11% ROE over those three years. 

 

I think if Fairfax keeps things simple...focus on strong, growing, conscientious insurance businesses...a diversified portfolio of quality bonds (not going to second guess whatever Brian does) and undervalued, quality stocks...complemented by quality, wholly owned businesses.  With their leverage and acumen, if they just do that, they'll hit 15% ROE long-term.  Keep it simple Prem!  Cheers!

 

I honestly cant see how you can make these statements?

 

Interest rates are at all time lows---unless of course rates go negative in the US? A clear head wind for any insurance company even if Brian B is making the calls on duration and quality.

 

Quality stocks---we are talking about Fairfax aren't we?

 

And I would love to get your feedback on the comments attributed to Prem in the recent G&M article. Has Fairfax closed out all its shorts? Have the comments attributed to Prem in the article left him with enough wiggle room to short again in the future?

 

I don't think they've taken out any other short positions.  That doesn't mean they don't have existing short positions or other hedges.  You cannot manage a leveraged reinsurance portfolio without hedging some of the risk.  You'd be a fool not to!  Whether that hedge is a large cash position or actual hedges is a matter of investment management...but Fairfax has always protected the downside to their portfolio, especially in periods of economic risk, and that's because it will ultimately affect their statutory surplus and ability to write business when premium pricing is high. 

 

In terms of buying quality bonds and stocks.  They learned to stop buying crappy turnaround insurance businesses and put Andy Bernard in charge of overseeing all insurance operations, they could do the same with the investment portfolio.  I think Wade Burton and Lawrence Chin will have more and more responsibilities.  I imagine the next generation of Fairfax positions to look more like Tom Gaynor, rather than Fairfax when the old guard at Hamblin-Watsa was fully in charge.  I also imagine we won't do as well on the bond side as Brian ages, so quality stocks will become more important.  I think we'll also see a change in the types of private businesses they buy...better quality...tier 1 instead of tier 2 and 3.  Cheers!

[StubbleJumper]

Also, one thing Thrifty didn't show, was that FFH's earnings in the last three years (2017-2019) was roughly $63 CDN per share...$64.98 USD in 2017, $11.65 USD in 2018 and $69.79 USD in 2019.  That's about 11% ROE over those three years. 

 

I think if Fairfax keeps things simple...focus on strong, growing, conscientious insurance businesses...a diversified portfolio of quality bonds (not going to second guess whatever Brian does) and undervalued, quality stocks...complemented by quality, wholly owned businesses.  With their leverage and acumen, if they just do that, they'll hit 15% ROE long-term.  Keep it simple Prem!  Cheers!

 

 

Sanj,

 

You need to go back to the posts in approximately February in this thread where we noted that earnings in the past three years have been characterized by a quality problem.  It's all fine and good to note that FFH had a 11% ROE in those years, but then you should probably qualify that statement by noting that a good chunk of that consisted of paper gains (ie, marking the airport to market last December, merging Grivalia and Eurobank, Thomas Cook/Quess etc).  FFH management should be given full credit for having created value in all three of those companies, but the value was created long before the paper gains were booked.  Thrifty's table, while depressing, is a long enough period to smooth out those lumpy transactions.

 

 

SJ

 

Hi Stubble, you are correct, but that cuts both ways.  You have to also assume that Fairfax's insurance businesses are worth a heck of a lot more than they are carried for in their books.  In other words, you could assume that book value per share may be closer to $625-650 USD in reality.  So you can't take away growth in book value on one hand and not give credit on the other hand.

 

I'm the first one to say that Fairfax has underperformed over the last 10 years.  That doesn't mean that the next ten years are going to be the same.  I'm buying at today's prices essentially after the pandemic at $380-430 CDN...not two years ago at $650 CDN per share.  I never owned BAC until it fell to $5 in 2008/2009...I still own most of those BAC shares...ten years later.  I'm not looking in the rearview mirror when I invest...I'm always...ALWAYS...looking forward!  Cheers!

 

 

Sanj,

 

You are suggesting that FFH is worth ~1.4x or 1.5xBV.  I might actually believe 1.2x, because most of the value is in the insurance subs.  There's really only about three ways that the insurance subs would be worth much more than book:

 

1) The subs' underwriting results are so spectacular that their ROE is high enough to merit a multiple;

2) Hamblin-Watsa's investment results are so spectacular that the subs' ROE is high enough to merit a multiple;

3) There is a "hidden" asset that is carried on the books for less than BV.

 

 

So, in your view, which of those three is currently the driver of a 1.4x or 1.5x multiple?  I don't doubt that the market will swing and FFH will eventually become overvalued again and might *trade* at some ridiculous level, but we are talking about value, not market bullshit, right?

 

 

SJ

 

Hi Stubble,

 

No I'm saying that Fairfax is worth 1.1 times.  My numbers are based on book today being back close to where it was at year-end 2019...around $486 USD...or about $610 CDN at 1.25 exchange.  1.1 times $610 CDN gives around $670 CDN per share.  And as you know, it's trading around $430 CDN.  Just getting back to fair value would be a 55% gain. 

 

In regards to the value of the insurance businesses, I was simply pointing out that if you say they benefitted in recent years from the realized value of certain assets, then you have to give some unrealized value to other assets, including insurance.  What was Fairfax Asia carried as on the books...what was the total realized sale price?  What about Riverstone Europe?  You are at zero interest rates...you don't think other insurers will pay up for Fairfax insurance assets?  Especially now that they are operating so well for nearly a decade?  Cheers!

 

Sure, I'd believe 1.1x BV.  That's not at all outrageous if Prem stops doing stupid shit with the investment portfolio.  All that 1,1x says is that it's worth more alive than dead.

 

I missed entirely the fact that you were talking about Canadian dollars (but in fact, you actually did write that) , but for some strange reason most people in this forum are anchored in Canadian dollars.  Just use US dollars and it's a great deal simpler.  This is no longer principally a Canadian company even if it is headquartered in Canada.  They report in US dollars, the pay the divvy in US dollars, and there is a US dollar based stock price.  Why would we even use Canadian dollars on this?!?  We aren't in 1999 anymore.

 

So, sure, 1x or 1.1x BV at at some point in the next five years is not at all Bat-shit crazy.  But, it's also not indicative of irreplaceable management.

 

 

SJ

[Parsad]

While I don't put any stock in it, as I do my own analysis, but for those that pay attention to insider filings...alot of directors buying stock regularly...not just Prem's massive $150M purchase a few months ago:

 

https://www.canadianinsider.com/company-insider-filings?ticker=FFH

 

If you believe they know more than you!  Hmmm!  Cheers!

[bearprowler6]

Also, one thing Thrifty didn't show, was that FFH's earnings in the last three years (2017-2019) was roughly $63 CDN per share...$64.98 USD in 2017, $11.65 USD in 2018 and $69.79 USD in 2019.  That's about 11% ROE over those three years. 

 

I think if Fairfax keeps things simple...focus on strong, growing, conscientious insurance businesses...a diversified portfolio of quality bonds (not going to second guess whatever Brian does) and undervalued, quality stocks...complemented by quality, wholly owned businesses.  With their leverage and acumen, if they just do that, they'll hit 15% ROE long-term.  Keep it simple Prem!  Cheers!

 

I honestly cant see how you can make these statements?

 

Interest rates are at all time lows---unless of course rates go negative in the US? A clear head wind for any insurance company even if Brian B is making the calls on duration and quality.

 

Quality stocks---we are talking about Fairfax aren't we?

 

And I would love to get your feedback on the comments attributed to Prem in the recent G&M article. Has Fairfax closed out all its shorts? Have the comments attributed to Prem in the article left him with enough wiggle room to short again in the future?

 

I don't think they've taken out any other short positions.  That doesn't mean they don't have existing short positions or other hedges.  You cannot manage a leveraged reinsurance portfolio without hedging some of the risk.  You'd be a fool not to!  Whether that hedge is a large cash position or actual hedges is a matter of investment management...but Fairfax has always protected the downside to their portfolio, especially in periods of economic risk, and that's because it will ultimately affect their statutory surplus and ability to write business when premium pricing is high. 

 

In terms of buying quality bonds and stocks.  They learned to stop buying crappy turnaround insurance businesses and put Andy Bernard in charge of overseeing all insurance operations, they could do the same with the investment portfolio.  I think Wade Burton and Lawrence Chin will have more and more responsibilities.  I imagine the next generation of Fairfax positions to look more like Tom Gaynor, rather than Fairfax when the old guard at Hamblin-Watsa was fully in charge.  I also imagine we won't do as well on the bond side as Brian ages, so quality stocks will become more important.  I think we'll also see a change in the types of private businesses they buy...better quality...tier 1 instead of tier 2 and 3.  Cheers!

 

Sanjeev, I did not ask about hedges. I asked about the comments attributed to Prem in the recent G&M regarding Fairfax's short positions.

 

Specifically, the article attributed the following comment to Prem:

 

"However, Mr. Watsa said the company is not making bets against any stock or sector at this time."

 

If this is an accurate statement than Fairfax has closed out the short that caused the unexpected loss in Q3. If it is not accurate then Fairfax needs to correct the record.

 

I also do not believe you have addressed the concern I raised about the ultra low interest rates. As you know, Fairfax is required to hold a significant portion of its overall portfolio in bonds. The yield on these securities has been all but eliminated given where rates are. The overall yield in the portfolio will continue to decrease as each bond being held matures. Any upward movement in rates will result in bond losses albeit unrealized if Fairfax is able to hold each bond to maturity. It is an open question whether the underwriting performance will be sufficient to offset the loss of yield on their bond holdings. I do not believe the loss in bond yield can be replaced by quality stocks. I am not sure what that statement even means?

 

You also commented that you believe Fairfax will change the type of private businesses they invest in---Tier 1 instead of Tier 2 or 3. What specific evidence do you have to support that statement? I see no evidence of this at all with the possible exception of the reorganization of Fairfax Africa and on this one I would have preferred that the company acknowledged that Fairfax Africa was a mistake and sold off its holdings. In the meantime they continue to hold numerous  retail and restaurant businesses that will take years to recover from the impact due to covid and if they do recover they will get back to being mediocre businesses at best.

 

Finally, you have previously referenced the positive impact that Wade Burton and Lawrence Chin will have on overall investment results. Two very talented and hardworking individuals but for now and for the foreseeable future Prem is in charge. Enough said on that point.

 

I just get a sense from what you write or how you write that you believe that everything will work out just fine. Clearly myself and other posters on here are not in that camp and have several very specific concerns that need to be addressed before we can wholeheartedly jump back into Fairfax in any meaningful way.

 

 

 

 

 

 

 

 

[KFS]

 

I think Wade Burton and Lawrence Chin will have more and more responsibilities.  I imagine the next generation of Fairfax positions to look more like Tom Gaynor, rather than Fairfax when the old guard at Hamblin-Watsa was fully in charge.  I also imagine we won't do as well on the bond side as Brian ages, so quality stocks will become more important.  I think we'll also see a change in the types of private businesses they buy...better quality...tier 1 instead of tier 2 and 3.  Cheers!

 

 

If this is true, it may be an incredibly important change, but I wish we had more insight into the investment style -- and the actual investments made by Burton/Chin.  What exactly do we really know about this?  I do remember Prem stating (about a year ago or so) that Wade Burton had a 19.5% compound return over 10 years, which is clearly outstanding, but I don't know any details.  I suppose it's safe to assume he wasn't invested in RFP or BB during this time period!....

 

Edit:  Prem stated this in the 2019 shareholders letter.  "Wade has achieved outstanding results since he began managing portfolios for us in 2008. Over that period, up to June 2018, Wade had a 19.5% compound return on his stock portfolio. Since June 2018, Wade and Lawrence Chin, who joined us in 2016, have compounded a stock and bond portfolio at 9.8% annually. We are looking forward to Wade’s increasing impact on Fairfax’s investment portfolios over time."

[chrispy]

While I don't put any stock in it, as I do my own analysis, but for those that pay attention to insider filings...alot of directors buying stock regularly...not just Prem's massive $150M purchase a few months ago:

 

https://www.canadianinsider.com/company-insider-filings?ticker=FFH

 

If you believe they know more than you!  Hmmm!  Cheers!

 

As many people have years of experience following Fairfax, is this amount of insider purchases atypical?

[Viking]

FFH average EPS:

 

- 2005 to 2009: $33

- 2010 to 2014: $17

- 2015 to 2019: $28

 

- 15 year average EPS: $26

 

Still under the same management.

 

....

 

Is this supposed to be supportive of the bull case?  Doesn't look that way to me.

 

12% ROE gives you a $70 per share net profit...that's today...gives you a 10 times multiple of around $700 per share or 1.2 times book.  If they compound at 12-15% ROE for the next 15 years...what would you say is fair value for that business  on a per share basis?  From a price of $430 CDN today.  Cheers!

 

So what do investors think is a reasonable ‘normalized’ annual earnings number for Fairfax? Fairfax targets compounding ROE at 15% which, as an average, is clearly much too high (with bond yields crazy low). Sanj suggests ROE compounding at 12% (CAN $70/share) which I think that is also too high as a long term average. I think Fairfax will be able to compound ROE at closer to 8% with 10% being ‘aspirational’. So is earnings per share of US$40/year a realistic number starting from Sept 30, 2020?

 

Last year Woodlock House capital estimated that Fairfax could hit a 10% ROE  = 95% CR + 5% return on portfolio

 

10% ROE growth looks achievable as an aspirational target:

1.) CR: insurance hard market should see Fairfax able to post a lower CR in the coming years with 95 a reasonable target looking out 2 years. It will depend on the length of the hard market. Tailwind.

2.) return on portfolio: if we see an economic rebound in 2H 2021 and into 2022 then Fairfax’s equity portfolio should perform well. Tailwind.

 

There is also a wild card with Fairfax: future asset monetizations. As the economy strengthens this will become another tailwind (realized gains and supply much needed cash).

 

Fairfax share price US $335.

Normalized earnings = $40/share = 8.4PE

Dividend = $10 = 3% yield

BV/share = $442 (Q3 2020)

 

Below is Woodlock House’s valuation summary from Sept 2019

- https://www.woodlockhousefamilycapital.com/post/the-horse-story

—————————————-

Moreover, I think the assets collectively could generate a ~10%-type ROE. Watsa has made a public goal of hitting 15%. (FFH’s ROE was 15% in the second quarter, thanks to investment gains). He says a 95% combined ratio and a 7% return on FFH’s investments gets to a 15% ROE.

 

But in a low-interest rate environment, and given a large bond portfolio, a 7% return seems unlikely. But possible. Sustaining a double-digit ROE is key. (FFH can reach 10% by following a number of roads. For example, one road requires a ~95% combined ratio and ~5% return on its portfolio. That seems do-able.)

 

Anyway, a consistent 10% would grow book value at a decent clip and then you’d likely get an additional lift from the valuation even if the stock moved just to 1.2x book. As RayJay reports, a comparable set of North American insurers with an 11% ROE trades for 1.7x book value per share.

[TwoCitiesCapital]

While I agree with others that low interest rates are an impediment to earnings - this isn't any different than in 2016-2018 when interest rates were also near zero and Fairfax traded much higher. The primary difference is just expectations - in 2016/2017 everyone expected rates to go higher and Fairfax to roll debt at higher rates (which mostly proved wrong after a very short period of rising rates).

 

So I don't think low interest rates is in itself an argument not to own them or value the company at book.

 

In 2017/2018, the outlook for Fairfax is as described below

1) Insurance was doing reasonably well - but not booming,

2) float growth was doing reasonably well, but not  accelerating

3) people thought interest rates were going sustainably higher, but ended up being wrong

4) equity performance expectations were a toss up.

 

With all of that, Fairfax traded at $400-600 USD over that time.

 

Now insurance IS booming, float growth IS accelerating, interest rates are still 0%, and equity performance is still a toss up - but could be better with valuations on many holdings being lower today than back in 2017.

 

I'm supposed to believe Fairfax deserves to trade 15-20% below the low-end of its range from 2016-2018 while being significantly better positioned?

 

Even if you're still in the camp of low interest rates hurting Fairfax after all of the above, $840 of float @ 2% is a 5% return to shareholders at today's prices - without consideration for insurance profitability, float growth, or any positive returns to equity or associates. At $600 USD, you needed interest rates to cooperate. At $350 USD, who cares if they don't?

 

[Thrifty3000]

While I agree with others that low interest rates are an impediment to earnings - this isn't any different than in 2016-2018 when interest rates were also near zero and Fairfax traded much higher. The primary difference is just expectations - in 2016/2017 everyone expected rates to go higher and Fairfax to roll debt at higher rates (which mostly proved wrong after a very short period of rising rates).

 

So I don't think low interest rates is in itself an argument not to own them or value the company at book.

 

In 2017/2018, the outlook for Fairfax is as described below

1) Insurance was doing reasonably well - but not booming,

2) float growth was doing reasonably well, but not  accelerating

3) people thought interest rates were going sustainably higher, but ended up being wrong

4) equity performance expectations were a toss up.

 

With all of that, Fairfax traded at $400-600 USD over that time.

 

Now insurance IS booming, float growth IS accelerating, interest rates are still 0%, and equity performance is still a toss up - but could be better with valuations on many holdings being lower today than back in 2017.

 

I'm supposed to believe Fairfax deserves to trade 15-20% below the low-end of its range from 2016-2018 while being significantly better positioned?

 

Even if you're still in the camp of low interest rates hurting Fairfax after all of the above? $840 of float @ 2% in a 5% return to shareholders at today's prices without consideration for insurance profitability, float growth, or any positive returns to equity or associates. At $600 USD, you needed interest rates to cooperate. At $350 USD, who cares if they don't?

 

+1

[Spekulatius]

On thought that crossed my mind is that it could work out really bad for insurers if interest rates stay near zero while inflation picks up. The reason  for this is that higher inflation means that cost to settle insurance claims will pick up.

 

Since premiums are paid for future claims, it means that the underwriting ratio will develop unfavorably in this case, because there costs will outrun the premium increases for a couple of years possibly.

[Viking]

On thought that crossed my mind is that it could work out really bad for insurers if interest rates stay near zero while inflation picks up. The reason  for this is that higher inflation means that cost to settle insurance claims will pick up.

 

Since premiums are paid for future claims, it means that the underwriting ratio will develop unfavorably in this case, because there costs will outrun the premium increases for a couple of years possibly.

 

My guess is if this scenario plays out we will simply see the hard market last longer. Insurers have been seeing inflation happen already for years on the cost side (social inflation).

 

For non-life insurance companies the big question for 2021 is where does the current hard market go? Does it last all year and into 2022? What average rate increase do we see each quarter? Looks like Q4 2020 will see strong price increases with no end in sight.

 

Yes other pieces are important:

1.) where does covid reserving go from here?

2.)  how strong is the economic recovery?

3.) where do interest rates go?

4.) how bad is catastrophe season?

[Parsad]

Also, one thing Thrifty didn't show, was that FFH's earnings in the last three years (2017-2019) was roughly $63 CDN per share...$64.98 USD in 2017, $11.65 USD in 2018 and $69.79 USD in 2019.  That's about 11% ROE over those three years. 

 

I think if Fairfax keeps things simple...focus on strong, growing, conscientious insurance businesses...a diversified portfolio of quality bonds (not going to second guess whatever Brian does) and undervalued, quality stocks...complemented by quality, wholly owned businesses.  With their leverage and acumen, if they just do that, they'll hit 15% ROE long-term.  Keep it simple Prem!  Cheers!

 

I honestly cant see how you can make these statements?

 

Interest rates are at all time lows---unless of course rates go negative in the US? A clear head wind for any insurance company even if Brian B is making the calls on duration and quality.

 

Quality stocks---we are talking about Fairfax aren't we?

 

And I would love to get your feedback on the comments attributed to Prem in the recent G&M article. Has Fairfax closed out all its shorts? Have the comments attributed to Prem in the article left him with enough wiggle room to short again in the future?

 

I don't think they've taken out any other short positions.  That doesn't mean they don't have existing short positions or other hedges.  You cannot manage a leveraged reinsurance portfolio without hedging some of the risk.  You'd be a fool not to!  Whether that hedge is a large cash position or actual hedges is a matter of investment management...but Fairfax has always protected the downside to their portfolio, especially in periods of economic risk, and that's because it will ultimately affect their statutory surplus and ability to write business when premium pricing is high. 

 

In terms of buying quality bonds and stocks.  They learned to stop buying crappy turnaround insurance businesses and put Andy Bernard in charge of overseeing all insurance operations, they could do the same with the investment portfolio.  I think Wade Burton and Lawrence Chin will have more and more responsibilities.  I imagine the next generation of Fairfax positions to look more like Tom Gaynor, rather than Fairfax when the old guard at Hamblin-Watsa was fully in charge.  I also imagine we won't do as well on the bond side as Brian ages, so quality stocks will become more important.  I think we'll also see a change in the types of private businesses they buy...better quality...tier 1 instead of tier 2 and 3.  Cheers!

 

Sanjeev, I did not ask about hedges. I asked about the comments attributed to Prem in the recent G&M regarding Fairfax's short positions.

 

Specifically, the article attributed the following comment to Prem:

 

"However, Mr. Watsa said the company is not making bets against any stock or sector at this time."

 

If this is an accurate statement than Fairfax has closed out the short that caused the unexpected loss in Q3. If it is not accurate then Fairfax needs to correct the record.

 

I also do not believe you have addressed the concern I raised about the ultra low interest rates. As you know, Fairfax is required to hold a significant portion of its overall portfolio in bonds. The yield on these securities has been all but eliminated given where rates are. The overall yield in the portfolio will continue to decrease as each bond being held matures. Any upward movement in rates will result in bond losses albeit unrealized if Fairfax is able to hold each bond to maturity. It is an open question whether the underwriting performance will be sufficient to offset the loss of yield on their bond holdings. I do not believe the loss in bond yield can be replaced by quality stocks. I am not sure what that statement even means?

 

You also commented that you believe Fairfax will change the type of private businesses they invest in---Tier 1 instead of Tier 2 or 3. What specific evidence do you have to support that statement? I see no evidence of this at all with the possible exception of the reorganization of Fairfax Africa and on this one I would have preferred that the company acknowledged that Fairfax Africa was a mistake and sold off its holdings. In the meantime they continue to hold numerous  retail and restaurant businesses that will take years to recover from the impact due to covid and if they do recover they will get back to being mediocre businesses at best.

 

Finally, you have previously referenced the positive impact that Wade Burton and Lawrence Chin will have on overall investment results. Two very talented and hardworking individuals but for now and for the foreseeable future Prem is in charge. Enough said on that point.

 

I just get a sense from what you write or how you write that you believe that everything will work out just fine. Clearly myself and other posters on here are not in that camp and have several very specific concerns that need to be addressed before we can wholeheartedly jump back into Fairfax in any meaningful way.

 

Do you have the print version of the article?  I cannot access it.  The quotes provided are comments from the writer...not Prem.  I cannot comment unless I see exactly what Prem's comments were.

 

On the comment regarding rates...that cuts two ways.  Fairfax can lower its interest rate costs on its debt.  Low interest rates will affect all financial institutions.  Fairfax is global and can invest in bonds in other countries and other currencies.  When it comes to generating bond income, I'm less concerned about Fairfax doing that while Brian is there.  He'll always do better than his peers.

 

Regarding Fairfax buying better quality investments and businesses.  I think that will just be the natural progression as the older Hamblin-Watsa team passes on duties to the Cundill influenced team of Wade Burton and Lawrence Chin.  Prem has the final call, but you guys don't understand how much free  rein Prem gives to the guys in charge.  And it's really a group of about 6-7 people who make the bulk of the investment decisions...by committee.  And while I don't expect Christine and Ben to have a major influence over the board...their investment experience, as well as Lauren Templeton's will have some influence as their tenure becomes longer and longer.  Overall, as you've read from Prem, Wade has a terrific record comparable to Tom Gaynor's.  They learned at the knee of Cundill and now Prem, Brian, etc. 

 

On the last paragraph...I'm not asking anyone to jump in.  I'm just saying that the psychology being displayed is something we've seen numerous times before on numerous stocks.  Usually, by the time investors are ready to jump in, they've already missed the first big stretch of gains!  Cheers!