Fairfax 2021

[Viking]

57 minutes ago, Gregmal said:

 

I don't disagree with you on the trading logic. The best trading setups are when there is an inflection or a variable change that is significant that the market doesnt recognize right away. However what I am saying is that I dont see the variable change here and you and others are basically just saying "its cheap". Which to me, has never really been the key to unlock the big move. And this logic continues to be lazily used here with shit such as "if you bought in March/April 2020", but even there, NO!! you're wrong! If you bought FFH during that time frame you made a mistake because you could have bought everything under the sun and probably done just as well if not better. You could have bought the index and done better! Which is what Im getting at. Maybe the setup here to folks is "its cheap". And maybe from here, the market or "value stocks" do 15% and FFH does 15% and everyone is high fiving about "yea FFH is on fire".... but thats a waste of time to me. I'm looking for the stock thats market neutral or setup to do 20% when the broader market does 5%. And to get that you need a change or an inflection and Ive yet to see or hear anything with FFH that puts it in that category. The closest I saw was in January, and a few of the more superb traders here like @SharperDingaansaw it and hit that move, but even there, there were much better alternatives like BRK.

Greg, if you do not understand the catalysts for Fairfax here are a few that come quickly to mind:

1.) the turn in its investment portfolio beginning in Q4. The increase over the past three quarters has been breathtaking - $4 or $5 billion? (I am too lazy to look up the exact numbers).

2.) insurance is in a hard market: top line is currently growing at close to 30% and underwriting profit may be at record levels moving forward.

3.) Digit revaluation: resulting in a significant increase in BV. Possible IPO in 2022. 
4.) results of non insurance operating companies should pick up in Q3 as global economies pick up. Improved profitability will flow through to Fairfax,

5.) Atlas Corp: Fairfax’s largest single investment has positioned itself to grow substantially in the next 24 months. Significant upside to Atlas shares. 
6.) Riverstone UK/Brit sale for cash of $1.1 billion (in August?)

 

Now timing, that is sometimes a tricky thing. When will Mr Market agree? 
 

Getting the catalyst and the timing exactly right at the same time… that is usually pretty difficult. And that is where patience comes in. 
 

My guess is over the next year Mr Market will get excited about many of the catalysts i listed above and will want to own Fairfax shares bidding the price higher in the process.

 

While i wait Fairfax will continue to grow its businesses, grow its profits and increase BV. As the old guy in the Reminiscences of a Stock Operator says ‘the big money is made by sitting on your hands’ - find the right opportunity, establish a position and then wait.

 

i get that lots of investors do not want to put their money in Fairfax. I can respect that. For those who are ok investing in Fairfax i hope they do well  

Edited August 3, 2021 by Viking

[glider3834]

3 minutes ago, Viking said:

Greg, if you do not understand the catalysts for Fairfax here are a few that come quickly to mind:

1.) the turn in its investment portfolio beginning in Q4. The increase over the past three quarters has been breathtaking - $4 or $5 billion? (I am too lazy to look up the exact numbers).

2.) insurance is in a hard market: top line is currently growing at close to 30% and underwriting profit may be at record levels moving forward.

3.) Digit revaluation: resulting in a significant increase in BV. Possible IPO in 2022. 
4.) results of non insurance operating companies should pick up in Q3 as global economies pick up. Improved profitability will flow through to Fairfax,

5.) Atlas Corp: Fairfax’s largest single investment has positioned itself to grow substantially in the next 24 months. Significant upside to Atlas shares. 
6.) Riverstone UK/Brit sale for cash of $1.1 billion (in August?)

 

Now timing, that is sometimes a tricky thing. When will Mr Market agree? 
 

Getting the catalyst and the timing exactly right at the same time… that is usually pretty difficult. And that is where patience comes in. 
 

My guess is over the next year Mr Market will get excited about many of the catalysts i listed above and will want to own Fairfax shares bidding the price higher in the process.

 

While i wait Fairfax will continue to grow its businesses, grow its profits and increase BV. As the old guy in the Reminiscences of a Stock Operator says ‘the big money is made by sitting on your hands’ - find the right opportunity, establish a position and then wait.

 

i get that lots of investors do not want to put their money in Fairfax. I can respect that. For those who are ok investing in Fairfax i hope they do well  

+1

 

I agree with Viking

 

I sold my shares in FFH in 2016 when it was trading at around CAD 700 per share because with their hedged positioning I couldn't see enough catalysts at that share price.

 

I re-established new holdings in the C$450 ish area over the last 9 mths, but the difference this time is that I can write a full list of catalysts now - most of which have been discussed on this forum

 

The risk/reward set up is completely different now IMO

 

But everyone is free to have their own views - I like hearing the bear arguments as a counter-check on my own investment thesis to see if I have missed something   

 

 

[nwoodman]

1 hour ago, UK said:

So, even if everything goes right, what is realistic upside/ceiling? Some 1.3?

No ceiling as far as I know.  Fairfax could conceivably be given a Fintech multiple by the market (I wish).  Can’t speak for others but I consider fair value to be 1.2-1.3x’s as it stands.  That has worked OK for me in the past.  My preference would be that they compound a believable book value at 15% and forever trade at 1x’s book

[petec]

3 hours ago, glider3834 said:

“The excess of estimated fair value over carrying value of all Fairfax non-insurance associates including Fairfax India associates is about $1.9B or more than $57/share after-tax (not included in book value).”

 

Has anyone figured out how RBC arrive at $57 per share? The table on p73 of the interim includes Fairfax India and gives the excess of fair over carrying as $754m or c.$29 per share. 

[petec]

17 hours ago, Thrifty3000 said:

 

@Viking and @Parsad how are you factoring in share count/dilution going forward? From 2009 to 2019 dilution was a pretty serious tax on EPS. Are those days behind us? I get they may have changed course on that recently, and some of the dilution may have been one time stock awards to incentivize long term managers. But, I dug up some of my notes from last year on this and the trend isn't in our favor:

 

Annualized Share Growth Rate Approx 4%

 

Diluted Share Count:

 

2009: 18,397,898

2010: 20,534,572

2011: 20,405,427

2012: 20,566,866

2013: 20,360,251

2014: 21,598,139

2015: 22,564,816

2016: 23,017,184

2017: 26,100,817

2018: 28,396,881

2019: 28,060,536

 

Share Based Awards

 

2009: 96,765

2010: 98,226

2011: -

2012: 240,178

2013: -

2014: 411,814

2015: 494,874

2016: -

2017: 689,571

2018: 890,985

2019: 1,159,352

 

Back on the share creep topic, my understanding from various sources including the 2020 annual report and the 1q18 call is that FFH issue very long dated (up to 15 year) restricted shares and equivalent to both insurance and investment staff. Vesting is at least partly performance based and part of the performance measure is whether the company meets the 15% BVPS cagr target. We can debate how effective these schemes are but I tend to think that, used in moderation, these schemes help align and retain employees. 

 

At 2q20 there were 1.53m dilutive share based payment awards outstanding and a further 1.25m that were antidilutive, for a total 2.78m or about 10.7% potential dilution if they all get exercised. Obviously more can be issued but my guess is this is not enormously different from most companies that use equity as part of compensation, especially when you consider that some of them vest over 15 years. 

 

Fairfax does not issue new equity to meet these obligations, but instead buys shares in the open market and keeps them in treasury. As of 2q20 there were 1.7m shares in treasury. Issuing these to employees would increase the share count but the cash to purchase them has already been laid out - effectively Fairfax have spent the last few years prefunding their share based awards at what they believe are cheap share prices. 

 

I have not gone back and added up how many shares FFH have reissued out of treasury over the last decade but they reissued 72,000 in 2019 and 147,000 in 2020 for a two year average of under one third of one percent of shares outstanding. On that evidence the pace of dilution is not egregious and the vast majority (possibly more than all) of the growth in share count over the last 12 years has been due to the acquisitions of Zenith, Brit, Allied, etc. 

 

What I do dislike is that Fairfax always refer to book value per basic share. To my knowledge they have never explained or been asked why they don't refer to book value per diluted share. Perhaps it is to remove the effect of share price moves on shares outstanding and give a purer measure of how the business has performed, but I think we as shareholders should always value the business using the diluted share count. 

 

Bottom line:

1) dilution to pay employees is not egregious and is being paid for cheaply.

2) most/all of the share count increase came from acquisitions, and Prem has been very clear that this phase of growth is over.

3) always recalculate BVPS for yourself using the diluted share count. 

 

 

Edited August 3, 2021 by petec

[ICUMD]

2 hours ago, petec said:

 

Has anyone figured out how RBC arrive at $57 per share? The table on p73 of the interim includes Fairfax India and gives the excess of fair over carrying as $754m or c.$29 per share. 

At the bottom of p73, I see the fair value of Fairfax India as 2669M vs carrying at 1301M.  Implied shares outstanding as per Yahoo finance is 149M.

 

This gives a fair value of $17.90 USD per share.

 

Thoughts?

 

 

 

[glider3834]

2 hours ago, petec said:

 

Has anyone figured out how RBC arrive at $57 per share? The table on p73 of the interim includes Fairfax India and gives the excess of fair over carrying as $754m or c.$29 per share. 

at bottom of p73 of Interim showing the fair value (7138) & carrying value (5211) for non-insurance associates (including Fairfax india) as presented in the consolidated financials - there is a difference of 1.9bil

 

The carrying value includes Fairfax India but appears they are also including non-controlling interests for Fairfax India in 1301.2 carrying value . Non-controlling interests own 71.6% or 931 mil (around 36 per share) which might explain difference??

 

Disclaimer here - I haven't read the actual RBC report & methodology, I just saw the headline posting in this thread so quoted from there 

 

Anyway I think better to work on $29 excess per share number as this is being reported by Fairfax - I think its worth pointing out that FFH are using Fairfax India share price (currently circa US$13 per share) as fair value  for their Fairfax India stake not book value (circa $19 per share)  in that $29 number so I think its conservative IMO

 

Using US$29 excess  plus BV $541 (30 June) plus expected Digit revaluation $46 (3Q21)  gives adjusted BV of US$616 or P/Adjusted BV =0.7 still cheap IMO

 

 

 

 

 

 

Edited August 3, 2021 by glider3834

[Gregmal]

6 hours ago, glider3834 said:

Gregmal when you look for an inflection point for a stock - are you looking at technical stuff like trading volume or daily buy/sell ratios?

 

No, its almost always major fundamental. Maybe something like AIV had technical aspects to it, forced selling, spin off, under $5....but generally its fundamental. Here for instance, Viking out together a good list, but only 3 and 4 I think might matter. Everyone already knows all the other stuff. Its out there. For me, I'd start going long and then probably get very long if I saw:

 

1) complete monetization of Resolute and Blackerry 

2) Share buyback or tender offer

3) after some time to let the market process 1+2 and soak up shares, list on NYSE

 

Is there ANY question that doing those 3 things doesnt create a totally different narrative here? Continuing to sleep with dogs or put on cute derivatives trades...to me, thats more of the same from the past bad behavior even though right now its kind of working for them. 

[SharperDingaan]

The reality is that FFH is NOT bought to get rich - it is bought to STAY rich. An investor simply hopes to make more than the index, and choses FFH as a diversifier to the Sched-A banks, BAM, SU, etc. - wealth made slowly via compounding. Nothing wrong in this, but recognize that it is what you are buying.

 

FFH is never going to get 'full market value'. It is just too complex for most to process, there are too many dung heaps, and the industry is too esoteric. It is just 'the nature of the business', but every quarter there will be some negative to latch onto and sell down on. Like it or not, Mr Market is a short term manic, not a long term builder.

 

However, the industry seasonality and dung heaps DO create periodic opportunities. You get rich by trading around them, and taking your gains off the table. At $CAD 525 a +/- sentiment driven round trip of 5% will produce roughly CAD 5.25K/100 shares, and take 4-8 weeks. An average two trips/yr will buy you a nice vacation after tax.

 

Investors are not employees, you do not make your wealth by working a lifetime for the company. The reality is that an ivestors holding period is a lot shorter than a working lifetime, hence the need for a different approach.

 

Different strokes.

 

SD

 

 

 

  

 

[petec]

Fairfax has traded around fair value plenty of times in the past, as do other highly complex entities. Also, this board generally obsesses far too much about Blackberry and Resolute in my view. There are many other things that move the needle and as they grow Blackberry and Resolute get less and less relevant. 

 

There are two things that I can see lifting the p/bv to a fairer level:

1) reasonably good results over a reasonably long period of time.

2) higher interest rates.

[petec]

Mosaic confuses me. They originally invested $100m of senior preferreds and $50m of 7-year debentures. With the recent announcement, they seem to have swapped $11m of remaining debentures and warrants for $132m of 25 year debentures. In addition, Mosaic's financials show $82m of preferreds outstanding.

 

I'm not sure whether Mosaic repaid some of the debs and prefs, or they got written off.

 

Either way, $132m of new debs for $11m of old debs seems a good deal for Fairfax. And Mosaic might be a $200m position now (preferreds and debentures, no equity or warrants).

[SharperDingaan]

Granted, even a broken clock will be right twice a day; but it doesn't mean keeping time by it. At times the market price may reach/exceed fair value, but it's more via the market trading a momo trend versus a fundamental valuation approach.

 

Agreed they have many investments, but it's largely the same story with all of them. The company either thinks they are worth a lot more than the market does (time difference), therefore no value add. The market expects a transaction in XYZ, and values in anticipation of a transaction that the company ultimately never does (execution difference); Blackberry and Resolute are just more recent examples. To benefit, you really have to round trip and not buy and hold - new names, same as the old names, but the game pretty much remains the same.

 

Just a different way of looking at it.

Every time the market goes manic on one of their investments, it's another round trip opportunity 

 

SD

Edited August 4, 2021 by SharperDingaan

[petec]

13 minutes ago, SharperDingaan said:

Granted, even a broken clock will be right twice a day; but it doesn't mean keeping time by it. At times the market price may reach/exceed fair value, but it's more via the market trading a momo trend versus a fundamental valuation aproach.

 

Agreed they have many investments, but it's largely the same story with all of them. The company thinks they are worth a lot than the market does,

 

SD

 

Nwoodman's graphs upthread show FFH trading at or above BV for most of the time since 2013. Nothing to do with a trading move. 

 

Separately, it would not surprise me if FFH traded above book for a long period when the market cottons on to the fact that it's the only listed way to own Digit.

 

 

[Candyman1]

10 hours ago, Gregmal said:

However what I am saying is that I dont see the variable change here and you and others are basically just saying "its cheap". Which to me, has never really been the key to unlock the big move. And this logic continues to be lazily used here with shit such as "if you bought in March/April 2020", but even there, NO!! you're wrong! If you bought FFH during that time frame you made a mistake because you could have bought everything under the sun and probably done just as well if not better. You could have bought the index and done better! Which is what Im getting at. Maybe the setup here to folks is "its cheap". And maybe from here, the market or "value stocks" do 15% and FFH does 15% and everyone is high fiving about "yea FFH is on fire".... but thats a waste of time to me. I'm looking for the stock thats market neutral or setup to do 20% when the broader market does 5%. And to get that you need a change or an inflection and Ive yet to see or hear anything with FFH that puts it in that category. The closest I saw was in January, and a few of the more superb traders here like @SharperDingaansaw it and hit that move, but even there, there were much better alternatives like BRK.

 

A. So I should just have bought the SPY at 30 times plus the shiller PE to see it go to a higher valuation? If you have the kind of foresight, why then didn't you buy AMC? That went up more than all the other stocks you mentioned. Investing to me is not just about how much does some other stock/asset go up in the future. My goal is to also wonder how much can this go down. If I am wrong on the SPY and we get some tech/economic recession I have way more downside with SPY I believe than I had with FFH at $300 USD. I looked at the IPO of Facebook and remember telling friends that I thought the runway for Facebook was insane. And still did not buy because I was afraid of the downside if Facebook turned out to be a dud. Imagine what could happen if Netflix doubles its amount of subscribers from the current 207 million and is able to increase its pricing by $2 a month? All very much possible I believe, but what happens if I am wrong. And do not think if I am right that Netflix subscriber growth is going to double in a straight line. It might struggle for some time and then growth might pick up again. Remember that Amazon was down 80% in the tech bubble. Investing through the rear view mirror is a lot easier than when looking through the windshield.

B. "It is just cheap." That is not what we were saying ever. The situation was that Prem bought $150 million USD in stock and there were good signs for a hard market. Also, it was trading at a very cheap valuation in absolute terms and on the basis of comps, and that I believed that end 2021 we would have a significantly higher book value per share. Read Vikings posts again if you do not believe me. He has been preaching about FFH for a long time.

C. This idea that stocks should move upon earnings is not my experience. I did pretty well during the mortgage crisis. I did not foresee the crisis way ahead, but I realized sooner than most, because of the obvious data I was seeing in housing data in MBS, this stuff was bad. I shorted financial companies and also owned FFH back then and kept wondering why others did not realize that FFH was about to make a killing on these CDS. I had to sit there for a while before the stock started moving with my boss complaining unendingly. Often it requires it to be super obvious before investors act. Like saying that the book value per share is going to be $600 is not enough, FFH must have published a book value per share of $600 plus before investors pay attention. Most investors out there, even professional fund managers, want certainty and do not delve into things like people do on this board. That brings me to the best quote I ever heard about investing .... "you always make more money when things go from truly awful to merely bad, than when they go from good to better." People want to buy when things are going good which will always be reflected already in the price and hope things will go better. Well I think we bought FFH at a valuation that reflected awful expectations.

Edited August 3, 2021 by Candyman1

[SharperDingaan]

"Nwoodman's graphs upthread show FFH trading at or above BV for most of the time since 2013. Nothing to do with a trading move. "

 

Yes .... but were they trading at/better than the MULTIPLE of B/V that their peers were trading at, at the time?

Sadly, not so much.

 

SD

[Gregmal]

3 minutes ago, Candyman1 said:

 

A. So I should just have bought the SPY at 30 times plus the shiller PE to see it go to a higher valuation? If you have the kind of foresight, why then didn't you buy AMC? That went up more than all the other stocks you mentioned. Investing to me is not just about how much does some other stock/asset go up in the future. My goal is to also wonder how much can this go down. If I am wrong on the SPY and we get some tech/economic recession I have way more downside with SPY I believe than I had with FFH at $300 USD. I looked at the IPO of Facebook and remember telling friends that I thought the runway for Facebook was insane. And still did not buy because I was afraid of the downside if Facebook turned out to be a dud. Imagine what could happen if Netflix doubles its amount of subscribers from the current 207 million and is able to increase its pricing by $2 a month? All very much possible I believe, but what happens if I am wrong. And do not think if I am right that Netflix subscriber growth is going to double in a straight line. It might struggle for some time and then growth might pick up again. Remember that Amazon was down 80% in the tech bubble. Investing through the rear view mirror is a lot easier than when looking through the windshield.

B. "It is just cheap." That is not what we were saying ever. The situation was that Prem bought $150 million USD in stock. That it was trading at a very cheap valuation in absolute terms and on the basis of comps, and that I believed that end 2021 we would have a significantly higher book value per share. Read Vikings posts again if you do not believe me. He has been preaching about FFH for a long time.

C. This idea that stocks should move upon earnings is not my experience. I did pretty well during the mortgage crisis. I did not foresee the crisis way ahead, but I realized sooner than most, because of the obvious data I was seeing in housing data in MBS, this stuff was bad. I shorted financial companies and also owned FFH back then and kept wondering why others did not realize that FFH was about to make a killing on these CDS. I had to sit there for a while before the stock started moving with my boss complaining unendingly. Often it requires it to be super obvious before investors act. Like saying that the book value per share is going to be $600 is not enough, FFH must have published a book value per share of $600 plus before investors pay attention. Most investors out there, even professional fund managers, want certainty and do not delve into things like people do on this board. That brings me to the best quote I ever heard about investing .... "you always make more money when things go from truly awful to merely bad, than when they go from good to better." People want to buy when things are going good which will always be reflected already in the price and hope things will go better. Well I think we bought FFH at a valuation that reflect awful expectations.

 

A. This is all perception. Thats ultimately what drives things and makes a market. As @thepupil pointed out in one of the other Shiller threads...there was so much obvious garbage factored in, case in point GOOG/MSFT. But yea, those were YOUR perceptions, some turned out to be right, some turned out to be wrong. Thats the name of the game. Everyone has access to the same numbers and filings. However the bigger picture conclusions en masse determine the way something will move. Last year there were plenty of folks in March 2020 talking about how ugly the PE would be after Q2 lockdowns. The smart money saw that didnt matter because theres more important stuff at play. On AMC, I just shorted puts because I found that was the most effective way to play whats going on there. Still probably is. 

 

B. But what has changed though? Its cheap. It got cheaper....thats not really anything changing. Prem bought stock and its cheap. Thats not really anything fundamental to me. The insurance is still solid. The PE approach is hit or miss. The equity portfolio we all see fluctuate day to day...its been doing very well, but most of these the market still has concerns about and won't give credit til cashed in. Theres still questions about whether they'll even be able to cash them in, and there's a case in point they've already whiffed on Resolute and especially BB. 

 

C. Earnings matter and move stocks typically when all else is the way it should be. When there isnt a management issue. When the macro outlook isnt extreme. When theres no secular issues. AAPL will move on earnings(move defined not by "day of earnings volatility" but rather a headwind/tailwind during days after earnings into next quarter). FFH or BRK will not. Right now the steel companies are a good example. Earnings dont really matter, everyone sees them and can model them. What really matters and drives things? Steel prices over the next few months. Same thing with the shipping cos. Day rates. Not how much theyre booking from last quarter. The market is generally accurate or in the ballpark in assessing what "was" or whats already happened. Ive personally found that only during times of extreme chaos or distress can you profit off something that is blatantly in the market already, and thats primarily because while its "known" people are more focused on other shit. Such was the case when RFP had a buyback and special dividend during covid but people just sold anyway. That backdrop definitely doesnt exist right now for most companies. 

[Viking]

4 hours ago, glider3834 said:

at bottom of p73 of Interim showing the fair value (7138) & carrying value (5211) for non-insurance associates (including Fairfax india) as presented in the consolidated financials - there is a difference of 1.9bil

 

The carrying value includes Fairfax India but appears they are also including non-controlling interests for Fairfax India in 1301.2 carrying value . Non-controlling interests own 71.6% or 931 mil (around 36 per share) which might explain difference??

 

Disclaimer here - I haven't read the actual RBC report & methodology, I just saw the headline posting in this thread so quoted from there 

 

Anyway I think better to work on $29 excess per share number as this is being reported by Fairfax - I think its worth pointing out that FFH are using Fairfax India share price (currently circa US$13 per share) as fair value  for their Fairfax India stake not book value (circa $19 per share)  in that $29 number so I think its conservative IMO

 

Using US$29 excess  plus BV $541 (30 June) plus expected Digit revaluation $46 (3Q21)  gives adjusted BV of US$616 or P/Adjusted BV =0.7 still cheap IMO

 

 

 

 

 

 

here is what RBC wrote in their Q2 report; they did not provide any further details in the report: “Other items of note: Buybacks in the quarter were about $63 million. The excess of estimated fair value over carrying value of the company’s non-insurance affiliates increased to $754m from a deficit of $458m at 12/31/20. Details of the calculation are included on page 73 of the interim report. The excess of estimated fair value over carrying value of all Fairfax non-insurance associates including Fairfax India associates is about $1.9B or more than $57/share after-tax (not included in book value). During the quarter, the company recognized unrealized gains related to its holdings in Blackberry debt and equity; they did not monetize any of this position in the quarter.”

[Candyman1]

3 hours ago, SharperDingaan said:

FFH is never going to get 'full market value'. It is just too complex for most to process, there are too many dung heaps, and the industry is too esoteric. It is just 'the nature of the business', but every quarter there will be some negative to latch onto and sell down on. Like it or not, Mr Market is a short term manic, not a long term builder.

Funny, that is exactly what my boss told me about FFH when I owned it because of the CDS before it made a big move.

 

[petec]

39 minutes ago, SharperDingaan said:

"Nwoodman's graphs upthread show FFH trading at or above BV for most of the time since 2013. Nothing to do with a trading move. "

 

Yes .... but were they trading at/better than the MULTIPLE of B/V that their peers were trading at, at the time?

Sadly, not so much.

 

SD

Perhaps I misunderstood you. I thought you argued that Fairfax only occasionally achieved fair value as the result of momo trends, whereas the p/BV graph shows it trading at a reasonable multiple fairly consistently. That’s all I’m saying.
 

Today it trades well below book despite having the greatest visibility on further book value growth that I can recall (hard market, 3q Digit mark, further Digit growth, good operating momentum in many of the big investments, buybacks). 

[TwoCitiesCapital]

10 hours ago, glider3834 said:

if BV is $541 (30 Jun-21) & we adjust for expected $46 increase from Digit revaluation of convertible preferred shares in Q3 & adjust a further $57 (see below - from RBC recent analyst report)  - can we say adjusted BV is closer to US$644 per share (versus $431 share price) for a P/adjusted BV = 0.66?

 

“The excess of estimated fair value over carrying value of all Fairfax non-insurance associates including Fairfax India associates is about $1.9B or more than $57/share after-tax (not included in book value).”

 

I think this is fair. It also still is the primary reason why I have $600-700 as the bottom of my range of reasonability. 

 

Considering the fair value of associates and those most of the insurance subs should likely be above book value on their own, an implied BV of $644 is the minimum it should trade for with a reasonable discount for potential cat claims. 

[Viking]

2 hours ago, Candyman1 said:

Funny, that is exactly what my boss told me about FFH when I owned it because of the CDS before it made a big move.

 

candyman1, thanks for the trip down memory lane. Yes, the CDS position was a $1,000 bill (not a $20 bill) lying on the ground for investors willing to pick it up. Most walked right by thinking it was not real.

 

it is a great case study in how investors ignore the facts in front of their face. Especially when there is a change in the facts (new news).  Instead they cling to the old narrative. It is very comforting.
 

The good news is the narrative does get updated eventually… as we learned with the CDS experience it just sometimes takes a little time. And then the shares all of a sudden pop for no reason at all. Like who could have known?  

Edited August 3, 2021 by Viking

[ERICOPOLY]

10 minutes ago, Viking said:

candyman1, thanks for the trip down memory lane. Yes, the CDS position was a $1,000 bill (not a $20 bill) lying on the ground for investors willing to pick it up. Most walked right by thinking it was not real.

 

it is a great case study in how investors ignore the facts in front of their face. Especially when there is a change in the facts (new news).  Instead they cling to the old narrative. It is very comforting.
 

The good news is the narrative does get updated eventually… as we learned with the CDS experience it just sometimes takes a little time. And then the shares all of a sudden pop for no reason at all. Like who could have known?  

 

Not for no reason at all.  It was the short selling ban on the Friday preceeding the pre-market Monday morning announcement of the $400m gain on closing out the AIG CDS..  The CDS portfolio had been exploding and for the same reason Fairfax was dropping like all of the financials were.  And there was also hurricane Ike as I recall to add more confusion.

 

 

 

[jfan]

On 7/31/2021 at 3:26 PM, Viking said:

Fairfax results are very volatile from year to year. I thought it would be interesting/educational to put pen to paper and estimate ‘normalized’ earnings power for Fairfax on a go forward basis. Please chime in with your own numbers and rationale or questions

 

Assumption: the global economy is in the process of entering the new normal (we learn to live with covid).

 

What are normalized earnings for Fairfax today? My estimates below are US$, quarterly and i have used the template Fairfax uses in their quarterly news releases:

 

Underwriting                 $210 million/quarter

Interest and Dividend   $115

Share of Profit of Assoc $60

Sub Total                       $385

 

Run off                            -$25

Non insurance co          +$25

Int Expense                    -$115

Corp Overhead              -$25

Sub Total                       -$140

 

Total                                $245

 

Net gains on investments $225 ($900 million annually?)

Total incl net gains        $470

 

Taxes and non-cont  interest  -$120 (25%?)

 

Net earnings                 $350/quarter

Per share                       $13.50/share/quarter = $54/year

Shares are trading at US $422

Is underwriting too high? Net gains on investments too low?

 

Given the complexity and difficulty forecasting all the volatility, I use a much simpler model to predict as few things as possible. 

 

I use their long-term geometric mean for total investment returns (which includes interest and dividends, share of profit from associates, realized and unrealized investment gains/losses and underwriting profits, interest expense, corporate overhead). I know I lose the granularity but with such variability in each factor, I would prefer to reduce the error in predicting each item and be more robust over time. **

 

The geometric mean since in inception is 7.7% with the most recent business cycle/10 years between 3-4%. 

This is on a base of $43.2 billion (2020) investment portfolio. This gives a ~ $48 - $125USD/share Earnings attributable to FFH shareholders and Minority interest after paying out preferred dividends.

 

With minority interest at 23%, FFH shareholders own ~ $37 - 97USD/share earnings.

 

Personally I believe it is not a stretch to think that they can keep it at 3-4%, the normalized EPS to FFH shareholders, should be ~ $37 - 50 USD/share.

 

At today's market price, this is about 9-12% earnings yield. Layer on their historical tangible BV per share growth of 2.8% and a median 3.2% stock dilution drag, I think I'm looking at a 9-12% total return.

 

Things I would like to see from them:

1) reduce their debt before buying back shares

2) stop making concentrated bets on deep value turnarounds (recognize that they don't have operational turnaround expertise or be effective activists)

3) Be more like Howard Marks and recognize that value investing doesn't have to be confined to their narrow definition and be more flexible and creative as they can be with building insurance start-ups.

4) simplify their corporate ownership structure and spin-out some of their holdings to shareholders

5) Stop using their shares as acquisition currency

 

** they have changed their presentation of their average total return from prior years (2019 onward)

 

Viking - thanks for all your granularity and spreadsheets! Much appreciated

 

 

 

[petec]

Jfan 

 

What would you like to see them spin out?

 

Pete

[Candyman1]

From the MKL call. 

 

We've realized significant premium growth across both our Insurance and Reinsurance operations. At the same time, we've achieved double-digit rate increases in Insurance and Reinsurance.

 

Most importantly, we see continued runway to capture strong growth and price increases, throughout the remainder of the year.

 

Earned premiums were up 16% in the quarter and 14% for the six months, due to continued premium growth across multiple quarters. Premium growth in both periods was driven by continued strong new business growth along with the impact from rate increases across several product lines, most notably in our professional liability and general liability product lines.

 

As discussed in prior quarters, we continue to see favorable rate environments within most of our product lines, with the exception of workers' compensation.

 

As we enter the third quarter, we see continuing pricing momentum in almost all lines. Our insurance rate increases continue to average in the low-double-digits.

 

 

Jeff Schmitt

Hi, good morning. Just looking at growth levels and rate levels in the insurance segment, professional liability, general liability, you've been compounding rates for several years now. I presume your rate adequacy have been for some time. But are you seeing any signs of increasing competition there or do you think the market is still kind of rate efficient? I mean it seems like a good opportunity to continue expanding your margins there.

Richie Whitt

Hey, Jeff, yes, rates have been very good in professional and casualty. And I do think we – I think we've been at rate adequacy for quite a while. I do think there is concern in the industry around just what may happen with claims inflation, social inflation and things of that sort. And so I think that has kept pressure on rates. I think also just the fact that it takes a lower combined ratio today to generate acceptable returns, given the interest rate environment. So I think there's a lot of factors at play.

As I mentioned in my prepared remarks, professional liability and casualty, where Markel is really made its name over the decades. I mean that's where we have always performed extremely well and we like that business and we like to grow when the opportunity is there.

So Rates continue to be solid. I think as other people have said, I think they've plateaued but we don't see them falling off, which is nice to see. So those are the areas that we are most comfortable and have seemed to be most profitable for Markel over the years and we're going to continue to push forward hard in both those areas both on the Insurance and Reinsurance side.