Fairfax 2022

[Viking]

1 hour ago, TwoCitiesCapital said:

 

They don't get much talk because they basically moved into short-term debt in 2016 and there hasn't been much to talk about since. 

 

The initial move was brilliant. Rates went up. But, they missed the re-entry in 2018 and so it's just been a matter of collecting lower and lower interest for the last 4-5 years as rates have moved lower. Nothing really to trade. No major gains/losses.

 

Bradstreet has a great track record for sure, but I do think it was a mistake to not have been inching out in 2018 into 2019 as the curve inverted and predicted a recession.  Missed the whole drop from 3.25% to 0.5% while collecting declining interest when could have been making capital gains and slightly higher interest. 

 

After getting the initial call right and missing 100+ bps of rate hikes, might've made sense to start locking some of that in even if you didn't go all of the way out to 10-years - particularly with the yield curve predicting lower rates to come. 

What i love about investing is a batter NEVER gets called ‘out’ if they miss a fat pitch right down the middle. The trick is to be patient. Keep your plate discipline. And to re-focus and get ready so you can hit the next fat pitch out of the park.
 

Fairfax has been remarkably disciplined with the fixed income portfolio since the pandemic started. Early on Fairfax did load up on corporate bonds ($5 billion?) but the Fed and Treasury unleashed hell so the opportunity to buy higher yielding bonds literally lasted days. And then Fairfax sold pretty much everything they had purchased when rates bottomed out (realizing significant capital gains). A solid single. The plate discipline has been impressive (keeping duration this low and not reaching for yield).

 

But it looks like the pitcher is getting tired and is about to lob a grapefruit right down the middle of the plate. Something that even i could probably rip pretty good. My guess is Bradstreet is highly focussed right now. And getting ready to swing very hard. Let’s hope he still has one good swing left  

Edited February 5, 2022 by Viking

[TwoCitiesCapital]

8 minutes ago, Viking said:

What i love about investing is a batter NEVER gets called ‘out’ if they miss a fat pitch right down the middle. The trick is to be patient. Keep your plate discipline. And to re-focus and get ready so you can hit the next fat pitch out of the park.
 

Fairfax has been remarkably disciplined with the fixed income portfolio since the pandemic started. Early on Fairfax did load up on corporate bonds ($5 billion?) but the Fed and Treasury unleashed hell so the opportunity to buy higher yielding bonds literally lasted days. And then Fairfax sold pretty much everything they had purchased when rates bottomed out. A solid single. The plate discipline has been impressive (keeping duration this low and not reaching for yield).

 

But it looks like the pitcher is getting tired and is about to lob a grapefruit right down the middle of the plate. Something that even i could probably rip pretty good. My guess is Bradstreet is highly focussed right now. And getting ready to swing very hard. Let’s hope he still has one good swing left  

 

I would love it. But since he didn't bite in 2018 and there hasn't been an acknowledgement that it was a mistake, it makes me feel they're still waiting for rates above 3.25%.

 

And my fear is we probably won't see that. Not in a sustained way at least. 

[Daphne]

I’m not sure we have enough inside context to judge it to have been a mistake.

[bluedevil]

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…
 

 

 

 

 

 

 

 

[Xerxes]

2 hours ago, bluedevil said:

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…
 

 

 

 

 

 

 

 

FFH always advertised themselves as one with lumpy return and Markel does not. 
 

To me as long as they (each) match their “Restaurent” menu with what they are actually selling. That is all good. 
 

Current & prospective investors will gravitate to preferred menu.
 

I suspect a lot of people have gotten into FFH at a good price vs. Intrinsic value and now that they are in, they may want a “smooth” Markel-like operation. I cannot say I blame that point of view. To me that periodic FFH discount is the discount due its lumpy rerun model. If I am all in at discounted price, there is a tendency to not prefer lumpy model going forward.
 

That said, I am happy with lumpy return. I added to Alphabet (finally after 4 years). So I get my smoothies elsewhere.  
 

FFH shorts were different story. When you at 100% hedged, for so long, against a long portfolio. That is the anti-thesis of lumpy return. So it had to go.  
 

 

Edited February 5, 2022 by Xerxes

[bluedevil]

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.

 

[Viking]

3 hours ago, bluedevil said:

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.

 

@bluedevil agree with pretty much everything you said. The swing for the fences macro approach is why Fairfax will likely never be a long term hold for me. Especially when i strongly disagree with what they are doing (like their since discontinued ‘shorting’ strategy).  However, it is possible to understand Fairfax’s big bets. And when they are right it pays (and usually handsomely) to own shares. Because the impact on earnings (with a lag) is usually material:
1.) ending the short strategy was a massive win. It eliminated a US$500 million loss EVERY YEAR, on average, for 7 straight years (with 2020 being the last year). Fairfax had to find $500 million every year from somewhere just to get to back to break even. When people look at Fairfax historical results they do not appreciate what an anchor this one strategy was to results over 7 years. And now that this has ended, we are only beginning to see the benefits. We are finally stating to see what the true earnings power of the company really is. Earnings in 2021 were stellar.
2.) the turn in their equity portfolio in late 2020 and subsequent gains in value past 15 months

3.) massive gains from Digit revaluation

4.) continued growth in net written premiums of 20%

5.) improving underwriting… will we see an average CR of 95 or better?

Now all of the above tailwinds are pretty well understood as we have been discussing them for the past year. The EMERGING TAILWIND is:

6.) the spike in bond yields

 

Fairfax’s bond portfolio is exceptionally well positioned for the current environment (out of control inflation). And when one of Fairfax’s macro bets starts to ‘work’ it pays for investors to own Fairfax shares. That has been my learning from following and successfully investing in the company’s shares for the past 20 years.

 

Now it is still early days and far to early to declare victory on the ‘rising interest rate’ macro call. However, it certainly looks promising. And worth monitoring…

Edited February 7, 2022 by Viking

[Xerxes]

51 minutes ago, Viking said:

1.) ending the short strategy was a massive win. It eliminated a US$500 million loss EVERY YEAR, on average, for 7 straight years (with 2020 being the last year). Fairfax had to find $500 million every year from somewhere just to get to back to break even. When people look at Fairfax historical results they do not appreciate what an anchor this one strategy was to results over 7 years. And now that this has ended, we are only beginning to see the benefits. We are finally stating to see what the true earnings power of the company really is. Earnings in 2021 were stellar.

 

 

Viking,

i never understood where you got the $500 million figure. I don't think that it is from Prem, because I usually remember his statement.

 

Did you just take the average for the past decade of the "short" bucket, it came out to $500 million per annum.

 

That is what I tabulated in the 2035-year thread, which I guess i will update this Thursday for 2021.

 

REALIZED LONGS

 

2011:  $703 million (equity) + $424 million (bond)

2012:  $470 million (equity) + $566 million (bond)

2013:  $1,324 million (equity) + $65 million (bond)

2014:  $596 million (equity) + $103 million (bond)

2015:  $818 million (equity) + $26 million (bond)

2016:  ($184) million (equity) + $648 million (bond)

2017:  $200 million (equity) + $419 million (bond)

2018:  $1,326 million (equity) + $106 million (bond)

2019:  $792 million (equity) + ($55) million (bond)

2020:  $392 million (equity) + ($102) million (bond)

 

REALIZED SHORTS

 

2011:  zero

2012:  $6.3 million

2013:  ($1.350) billion

2014:  $13 million

2015:  $126 million

2016:  ($2.634) billion

2017:  ($553) million  (almost all of it in Q4 2017!)

2018:  ($248) million

2019:  ($20.7) million

2020:  ($311+$542*) million    *included Other which I believe are the TRS

[glider3834]

I think Fairfax's focus is more about protecting the balance sheet, rather than 'timing' an increase in interest rates. 

 

But higher cash/ST investment weighting gives them optionality to take advantage of higher rates. 

 

 

 

 

Edited February 7, 2022 by glider3834

[Viking]

2 hours ago, Xerxes said:

 

 

Viking,

i never understood where you got the $500 million figure. I don't think that it is from Prem, because I usually remember his statement.

 

Did you just take the average for the past decade of the "short" bucket, it came out to $500 million per annum.

 

That is what I tabulated in the 2035-year thread, which I guess i will update this Thursday for 2021.

 

REALIZED LONGS

 

2011:  $703 million (equity) + $424 million (bond)

2012:  $470 million (equity) + $566 million (bond)

2013:  $1,324 million (equity) + $65 million (bond)

2014:  $596 million (equity) + $103 million (bond)

2015:  $818 million (equity) + $26 million (bond)

2016:  ($184) million (equity) + $648 million (bond)

2017:  $200 million (equity) + $419 million (bond)

2018:  $1,326 million (equity) + $106 million (bond)

2019:  $792 million (equity) + ($55) million (bond)

2020:  $392 million (equity) + ($102) million (bond)

 

REALIZED SHORTS

 

2011:  zero

2012:  $6.3 million

2013:  ($1.350) billion

2014:  $13 million

2015:  $126 million

2016:  ($2.634) billion

2017:  ($553) million  (almost all of it in Q4 2017!)

2018:  ($248) million

2019:  ($20.7) million

2020:  ($311+$542*) million    *included Other which I believe are the TRS

@Xerxes Last year i did the math (it is in post) and i think the average loss over 7 years was around US$500 million. Very lumpy. But the average cost was the average cost. 
 

To cover the the ongoing significant losses Fairfax HAD to sell good assets too soon. This creates a vicious circle where FUTURE RETURNS are then lower (in Peter Lynch terms they were forced to pull their flowers and water their weeds). This is one of the reasons i keep saying looking at PAST RESULTS for Fairfax WAY UNDERESTIMATES their true earnings power today. 
 

We are just starting to see what Fairfax is capable of. Watch what happens to earnings when they:

1.) consistently write at a sub 95CR - on the significantly higher premium base

2.) Atlas trades north of $20/share and Eurobank trades over €1.50… and most of the remaining equity holdings chug along higher

3.) Digit IPO

4.) start moving further out on the yield curve with a significant part of their bond portfolio

 

Of course there will be set backs. And it will not be a straight line up. But with Fairfax shares trading at < US$500 there is a lot of upside given all the current tailwinds. 

Edited February 7, 2022 by Viking

[Viking]

1 hour ago, glider3834 said:

I think Fairfax's focus is more about protecting the balance sheet, rather than 'timing' an increase in interest rates. 

 

But higher cash/ST investment weighting gives them optionality to take advantage of higher rates. 

 

 

 

 

Yes, there is likely lots more to the duration question than simply a guess on future interest rates. 
 

I wonder how the real estate and commodity holdings also factor in to their inflation outlook.

 

On the real estate side you have Kennedy Wilson (stock) but more importantly the partnership with mortgage bonds. The Toys R Us real estate must have increased significantly in value since purchase (+$100 million?)

 

Stelco has been a home run. Resolute is well positioned (holding this long term dog was the correct decision IMHO). I am really looking forward to getting an update on EXCO Resources (nat gas and some oil) when they release the AR; this position must have increased in value a couple hundred million over the past year. Ensign Energy is well positioned (should drilling ever pick up). Altius Minerals has been performing ok. And they just invested in Foran Mining to increase long term exposure to metals.

 

Bottom line, Fairfax has significant exposure to real estate/commodity equities. My guess is the positioning was driven largely by a desire to hedge against inflation risk. It certainly is looking smart today. Especially when you overlay the current duration of the bond portfolio.
 

Fairfax took out significant protection to their investment portfolio for the risk of inflation. We like to focus on their big mistakes. Their current positioning for inflation might prove to be one of their best decisions of the past 5 years. 

Edited February 7, 2022 by Viking

[Parsad]

On 2/5/2022 at 9:43 AM, Xerxes said:

FFH always advertised themselves as one with lumpy return and Markel does not. 
 

To me as long as they (each) match their “Restaurent” menu with what they are actually selling. That is all good. 
 

Current & prospective investors will gravitate to preferred menu.
 

I suspect a lot of people have gotten into FFH at a good price vs. Intrinsic value and now that they are in, they may want a “smooth” Markel-like operation. I cannot say I blame that point of view. To me that periodic FFH discount is the discount due its lumpy rerun model. If I am all in at discounted price, there is a tendency to not prefer lumpy model going forward.
 

That said, I am happy with lumpy return. I added to Alphabet (finally after 4 years). So I get my smoothies elsewhere.  
 

FFH shorts were different story. When you at 100% hedged, for so long, against a long portfolio. That is the anti-thesis of lumpy return. So it had to go.  
 

 

 

Agree.  Fairfax has clearly indicated by this point what type of animal they are.  And for those that buy below intrinsic value and sell above intrinsic value, Fairfax will give you more opportunities.  But for those that want a smooth ride...look elsewhere!  

 

Perhaps it will change when Wade, Lawrence and the new breed run the show.  But as long as the old guard are present, you can expect volatility, but outsized long-term (and I mean long-term) results!  Cheers!

[ValueMaven]

Let me ask this - over the next DECADE - would you rather own: Berkshire, Markel, or Fairfax??  I know my answer!!  -- you can only pick ONE

 

Berkshire hands down... 

Edited February 8, 2022 by ValueMaven

[Xerxes]

Are we talking returns or risk-adjusted returns.

 

If the latter, Berkshire. Easy !

 

If the former, there in lies the enigma  

[Viking]

2 hours ago, ValueMaven said:

Let me ask this - over the next DECADE - would you rather own: Berkshire, Markel, or Fairfax??  I know my answer!!  -- you can only pick ONE

 

Berkshire hands down... 

 

The really cool thing is you DON’T HAVE TO HOLD ONLY ONE FOR THE NEXT DECADE. Will Berkshire be the same company when Buffet is no longer there? Clearly no. 
 

Let me ask this - over the next YEAR - would you rather own: Berkshire, Markel, or Fairfax??  I know my answer!!  -- you can only pick ONE

 

Fairfax hands down... 

—————

My experience is if you get the 1 year thing right the 10 year thing looks after itself.

—————

Most of my investments are in tax advantaged accounts so there is no cost for me to flip into better risk/reward investmemts.

Edited February 8, 2022 by Viking

[Munger_Disciple]

4 hours ago, ValueMaven said:

Let me ask this - over the next DECADE - would you rather own: Berkshire, Markel, or Fairfax??  I know my answer!!  -- you can only pick ONE

 

Berkshire hands down... 

 

w/o a question Berkshire. It is not even close. Higher quality assets, better management, better succession plan, better capital allocation, deeper bench strength, better investment strategy (buy great businesses to own forever),......... I could go on & on. 

Edited February 8, 2022 by Munger_Disciple

[glider3834]

1 hour ago, Munger_Disciple said:

 

w/o a question Berkshire. It is not even close. Higher quality assets, better management, better succession plan, better capital allocation, deeper bench strength, better investment strategy (buy great businesses to own forever),......... I could go on & on. 

but is the valuation better? 

[Parsad]

7 hours ago, ValueMaven said:

Let me ask this - over the next DECADE - would you rather own: Berkshire, Markel, or Fairfax??  I know my answer!!  -- you can only pick ONE

 

Berkshire hands down... 

 

These "what if" questions are fun, but not related to actuality.  You don't have to pick one, you don't have to swing unless it's a fat pitch, you don't have to even do anything.  You have the option of acting when opportunity presents itself...presently it's Fairfax.  Doesn't mean that will be the same situation 1-year, 5-year or 10-years from now.  Cheers!

[ValueMaven]

Well said @Parsad !!! 

[wondering]

Endorsement from National Bank analyst. - target price $1000 Cdn

 

National Bank Financial analyst Jaeme Gloyn sees Fairfax Financial Holdings Ltd. (

FFH-T +0.81%increase

 

) as “a mispriced large-cap financial,” calling its stock the “best value idea” in his coverage universe and raising his target for its shares to a new high on the Street on Tuesday.

 

In a research report previewing Thursday’s after-market release of its fourth-quarter financial results, he pointed to “two key themes investors commonly overlook.” They are:

1. Fairfax Financial’s ability to deliver “rapid and profitable premiums growth.”

“Given persistent hard market conditions, we expect premiums growth to exceed 20 per cent in 2021 and to remain in the double-digits through 2022,” he said. “Moreover, we anticipate Fairfax will sustain profitable underwriting, in line with the company’s 10-year average combined ratio of 96 per cent.”

2. The expectation for “rapid growth in the investment portfolio and improving returns ease the burden to achieve double-digit ROEs.”

“Invested assets of $52-billion as at Q3-21 are up 26 per cent year-over-year,” he added. “FFH’s 5-year average annual total return on its investment portfolio is almost 5.6 per cent (climbing from 2 per cent in 2017). Assuming a 96-per-cent combined ratio, we estimate FFH only needs to deliver a total return on investments of 4 per cent to reach our 12-per-cent ROE forecast in 2023. Crucially, nearly half of that total return comes from ‘locked-in’ interest & dividend income that stands to benefit from rising short-term interest rates given FFH’s 37-per-cent allocation to cash and short-term investments.”

Maintaining an “outperform” recommendation for Fairfax, Mr. Gloyn raised his target to $1,000 from $825. The average is currently $802.77.

“Still trading below book value at approximately 0.85 times, the market is pricing FFH at an ROE of 6 per cent,” he said. “We believe FFH can deliver sustainable long-run ROE in the doubledigits through a combination of consistently strong underwriting growth/profits and improving total investment return performance. Based on sector trading multiples today, double-digit ROE merits a valuation multiple above book value. In fact, our 2023 ROE forecast of 12 per cent implies a P/B multiple of more than 1.5 times. We apply a 1.1 times P/ B multiple (was 1.0 times) on our Q4 2022 estimate to arrive at our Cdn$1,000 price target ... Moreover, we anticipate FFH will continue to chart a more shareholder friendly course in the coming quarters that firmly started with the value surfacing sale/buyback transaction in late 2021.”

 

[Xerxes]

You are stuck on a desert island, you can only read one report (and only one), and your are cut off from all media sources, which one will be:

 

(1) Buffett' annual letter (2) Watsa's annual letter or (3) Markel's

 

LOL

[StubbleJumper]

4 hours ago, Xerxes said:

You are stuck on a desert island, you can only read one report (and only one), and your are cut off from all media sources, which one will be:

 

(1) Buffett' annual letter (2) Watsa's annual letter or (3) Markel's

 

LOL

 

I know that I'd end up using those letters for asswipe because it's a desert island.  Up until the last couple of years, WEB has generally been more verbose, so I gotta pick BRK.  Don't want to scrub my ass with sand....

 

 

SJ

[ValueMaven]

How about Fairfax vs. Markel?

[backtothebeach]

21 minutes ago, ValueMaven said:

How about Fairfax vs. Markel?

 

Which jockey do you trust more?

[Daphne]

Depends whether your goal is to win, place or show!