Fairfax 2022

glider3834 · February 12, 2022

33 minutes ago, nwoodman said:

One other thing that has been rattling around in my head after the CC was this:

Please note, that’s with half the portfolio, earning nothing because it had been cash and short-term securities. Of course, this includes $1.5 billion from Digit where they have completed a significant portion of the announced $200 million capital raise at a valuation of $3.5 billion. Kamesh Goyal have done an outstanding job at Digit and Digit is growing at 30% to 40% per year and it’s profitable.

I recall that the aim was to get Digit to break even around about this time which I think is pretty amazing for a startup. However, does this comment imply that the goal has been reached and then some? Perhaps I am reading too much into it

Without looking at their numbers, Kamesh Goyal was interviewed recently & said they became profitable on an IFRS basis by the end of their 3rd year in operation.

nwoodman · February 12, 2022

2 hours ago, glider3834 said:

Without looking at their numbers, Kamesh Goyal was interviewed recently & said they became profitable on an IFRS basis by the end of their 3rd year in operation.

Cheers, thanks for the reminder. Going back through the notes that was one of their claims to fame last year when they did the initial raise.

"The digital-only insurer had sold the first policy in October 2017 and has since then sold to over 20 million customers. It achieved break-even in the third year and entered the unicorn club in less than four years and is now valued at over USD 3.5 billion."

Edit: Covid took its toll so here's hoping Prem is referring to them getting back to profitability again.

Edited February 12, 2022 by nwoodman

Cigarbutt · February 12, 2022

On 2/10/2022 at 11:30 PM, Viking said:

...thanks for the lesson… much appreciated. ‘Swiss Re cover’…

Not as much a 'lesson' as a teaching moment for me. It felt as though a more material way to protect from reserve risk with covers and transfers was indicated during the 2017-9 period when it was felt that there were significant reserve deficiencies building in many lines, including casualty catastrophe (those developing trends can be a bummer; asbestos etc).

But across the industry and, similarly (and relatively better) for FFH, these reserve deficiencies have not occurred, at least so far, and even if were to occur at this point, the solidly priced recent hard market period would likely buffer such trends. One needs to have an open mind and i was wrong about that (we had exchanged about this topic some time back). The following (offering of reserve risk mitigating products) explained that perspective:

affiliates_maf_0319_3_lpts_and_adcs_for_risk_mgmt_dustin_loeffler.pdf (casact.org)

Having said that, FFH was careful with rising premiums during that specific period by keeping a relatively low level of retention, which, in retrospect, appears to have been the right strategy in that part of the underwriting cycle.

-----

Along the same conceptual line, FFH has decided to deal with interest risk in its own specific way and they may be right once again?

MMM20 · February 12, 2022

On 2/11/2022 at 7:26 PM, nwoodman said:

Looking forward to the annual report this year. Prem gave the impression that there would be even more new and improved metrics.

This was an interesting observation and response

Unidentified Analyst

How are you? Warren Buffett has written extensively about the importance of float. He said that even though float is a liability, if the combined ratio is below 100%, it is actually an asset. Berkshire has $130 billion in float against $700 billion in market cap. Our Fairfax has $26 billion in float against $13 billion in market cap. We are running at a 95% combined ratio. Can you tell us how you think about the value of float to Fairfax? It’s remarkable.

Prem Watsa

You are exactly right, Charles, you understand it. $26 billion of float like it’s just a significant number and combined ratio of 95%, our reserving is very strong. It just shows you how undervalued our company is. And that’s why, I have said, we bought back our stock of 2 million shares.

We will continue to buy back stock. I mean, we can’t control the price of our stock. I said it’s ridiculously cheap, two years ago, I said it again, and then we bought 2 million shares. We will not do -- we are not looking at expanding again, I said. We are not going to issue any shares to buy anything.

Our first consideration is going to buy back shares, not at the expense of our financial position, not at the expense of taking advantage of the property casualty hot market, like we have grown by 25%. Charles, you know, you follow these insurance companies, you compare our growth to anyone else, all internal and you will find that 25% is a very high number.

And we have got companies like Allied at $6 billion, ROC at pretty well $6 billion, come at $4 billion, like we have got pretty significant companies, but it’s a decentralized structure and we can take advantage of the opportunity as we see it always looking after our customers, because the price we are getting for our product is a fair price now, we are getting paid to take the risk. So, yeah, Charles, you are exactly right, $26 billion in float, the market will see it over time. Thank you, Charles. Next question, please, Britney

I wish Prem addressed the point more directly. 95% combined ratio = 5% net margin on *underwriting* (note: edited) = $1B+ in income. Apply a 10x multiple to that and it's $10B in our intrinsic value calculation. I prefer to use more like ~2-3% normalized u/w profit in my thinking about this, but if it's ~5% then IV could easily be upwards of $1,500/share. Why not just lay that out for folks? Maybe b/c they want to do a Teledyne!

Edited February 13, 2022 by MMM20

petec · February 12, 2022

1 hour ago, MMM20 said:

I wish Prem addressed the point more directly. 95% combined ratio = 5% net margin on $26B in float = $1B+ in income. Apply a 10x multiple to that and it's $10B in our intrinsic value calculation. I prefer to use more like ~2-3% normalized u/w profit in my thinking about this, but if it's ~5% then IV could easily be upwards of $1,500/share. Why not just lay that out for folks? Maybe b/c they want to do a Teledyne!

Surely you should multiply CR by Premiums written, not float? Sorry if I’m being thick.

value_hunter · February 12, 2022

1 hour ago, petec said:

Surely you should multiply CR by Premiums written, not float? Sorry if I’m being thick.

if use premiums earned ($16.5 B), we will get around $0.82B income just from insurance operation. That's still very impressive.

Xerxes · February 12, 2022

nothing to add on the conference call aside the question/comment by the Leucadia analyst, who seem to indicate that he actually personally own FFH shares. In the Q3 call, the same analyst mentioned that he also owns Atlas. I know they are the same person since they in both times comments were made about dividend increase.

how could a sell-side analyst have personal ownership of the stock or associated stock (Atlas)??

modiva · February 12, 2022

Congratulations to Fairfax teams and the shareholders!

The stock continues to stay cheap with easy 2x potential in 2 years and still be an attractive business to own.

Many interesting observations from the call made by members. I wanted to point to one interesting question and Prem's response as one of the validation points of the investment thesis.

The question was something like: Selling 10% of ownership of Odyssey got $1B. The total ownership is $10B making up 70% of Fairfax market cap. The idea that the shares are trading so cheap is hard to believe. Prem confirmed that it is indeed the case.

Edited February 13, 2022 by modiva

Viking · February 12, 2022

1 minute ago, modiva said:

Congratulations to Fairfax teams and the shareholders!

The stock continues to stay cheap with easy 2x potential in 2 years and still be an attractive business to own.

Many interesting observations from the call made by members. I wanted to point to one interesting question and Prem's response as one of the validation points of the investment thesis.

The question was something like: Selling 10% of ownership of Odyssey got $1B. The total ownership the is $10B making up 70% of Fairfax market cap. The idea that the shares are trading so cheap is hard to believe. Prem confirmed that it is indeed the case.

Does anyone know how the 2 pension funds get paid for their 9.9% equity stake in Odyssey? Do they get paid solely via their share of Odyssey earnings?

Or do they get paid via guaranteed fixed payment each year from Odyssey (more like a bond type payment).

The answer to this will help me understand how meaningful the amount paid for 9.9% of Odyssey can actually be extrapolated to value all of Odyssey (and then Fairfax).

Munger_Disciple · February 13, 2022

I have recently started looking at Fairfax mainly due to its cheapness (it should be cheaper than Berkshire as I consider it lower quality). I am trying to answer (to myself) if it as cheap as it looks. A few questions for the Fairfax experts:

1. We know Ajit Jain is the genius running Berkshire's insurance businesses. Who is the equivalent of Ajit at Fairfax (not just in terms of running the ops but the brain behind it)?

2. Is the float primarily from long tail liabilities or short tail?

3. It appears that annual premiums written by Fairfax is a much bigger % of its net worth (also float as a % of net worth) than at Berkshire which implies higher insurance leverage. This implies any negative surprises in the insurance business will have a much greater impact at Fairfax than at Berkshire. How are people comfortable with this leverage?

4. What is the succession plan at Fairfax? If something were to happen to Prem tomorrow, who will be running the show the day after?

Thanks in advance.

Edited February 13, 2022 by Munger_Disciple

Viking · February 13, 2022

1 hour ago, Munger_Disciple said:

I have recently started looking at Fairfax mainly due to its cheapness (it should be cheaper than Berkshire as I consider it lower quality). I am trying to answer (to myself) if it as cheap as it looks. A few questions for the Fairfax experts:

1. We know Ajit Jain is the genius running Berkshire's insurance businesses. Who is the equivalent of Ajit at Fairfax (not just in terms of running the ops but the brain behind it)?

2. Is the float primarily from long tail liabilities or short tail?

3. It appears that annual premiums written by Fairfax is a much bigger % of its net worth (also float as a % of net worth) than at Berkshire which implies higher insurance leverage. This implies any negative surprises in the insurance business will have a much greater impact at Fairfax than at Berkshire. How are people comfortable with this leverage?

4. What is the succession plan at Fairfax? If something were to happen to Prem tomorrow, who will be running the show the day after?

Thanks in advance.

@Munger_Disciple here are a few comments to get you started:

1.) Andy Barnard is running the insurance side of Fairfax and has been for many years now (at least a decade). Prior to that he ran Odyssey Re. Odyssey has been one of the crown jewels of Fairfax - very good long term track record. I think Prem has discussed how Andy runs the insurance side of things (profit centre's, decentralized, high level of accountability etc)… i’ll do some searching and see what i can find.
2.) float: RBC has mentioned that Fairfax tends to write longer tail business

3.) leverage: i’ll let others more knowledgable than me comment here

4.) succession planning: Andy is running the insurance side of things. On the investment side of things i think there is a transition happening from the old guard (Prem - equities, Brian Bradstreet - Bonds) to the new guard (Wade Burton, Lawrence Chin etc. My guess is this has been happening for the last couple of years - and you can see it in the shift in types of equities Fairfax is putting new money in to the past 3 or 4 years (and how they have been fixing the many past equity mistakes made 4 and more years ago). In the last annual report Prem talked about how Wade/Lawrence would be getting more money to manage given their successful long term track record. Importantly, employees seem to really like Prem and working at Fairfax. It should be noted the CEO’s of both Brit and Allied both left after they were acquired.

Edited February 13, 2022 by Viking

Viking · February 13, 2022

The shocker for me when Fairfax reported Q4 results on Friday was the combined ratio of 88 for Q4 - which brought Fairfax down to a 95 CR for full year 2021 ($801 million underwriting profit). It now looks to me like a CR of 94 could be a conservative estimate for 2022 (given 2021 was 4th worst year on record for cat losses).

Three short months ago i estimated Fairfax would post a 97CR for full year 2021. Very wrong. And i felt a 96 CR was an achievable estimate for 2022. Looking very wrong today as well.

So whats the big deal? So what if the CR improves by a couple of percent. Does it really make much of a difference in $? Yup. If Fairfax can achieve a 94CR next year they will earn about US$1.1 billion from underwriting = $46/share. Fairfax shares are trading at under US$520 today. Now, yes, $46 is pre tax. But still… that is nuts. Because that $46 does not include:

1.) GROWING interest and dividend income (they benefit big time from rising rates)

2.) GROWING share of profit of associates (driven by Eurobank and Altas, both poised to have breakout earnings in 2022)

3.) gains from an investment portfolio that is skewed to cyclicals/value/resources (net gains totalled $2.3 billion in 2021)

4.) another $400 million gain in Q1 from Digit is coming (after net gains of $1.49 billion in 2021)
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Net earned premiums. Underwriting profit

2022. $18.1 est. $1,100 est. $46/share

2021. $15.5. $801. $31/share

2020. $13.9. $308. $12/share

—————-

Fairfax earned an underwriting profit of about $335 million per year on average from 2018-2020 ($13/share). It was $801 million in 2021. Estimated underwriting profit of $1.1 billion in 2022. Yes, the magnitude of the increase is very large and meaningful, especially when you compare it to the average from 2018-2020 (more than a $750 million increase).
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Conservative reserving tailwind: given we have been in an insurance hard market for over two years now (i use Q4 2019 as the start) all P&C insurance companies have had ample opportunity to pad reserves pretty well. This padding of reserves is not captured in the reported CR. So it does not sshow up in reported earnings. Rather, the benefit resides (and hides) within P&C balance sheets. This is a hidden asset that will benefit shareholders ONLY in future years via reserve releases. Who cares? This suggests to me we will likely see reported CR start to surprise to the downside (modestly) in the coming years driven in part by higher than expected reserve releases.

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How might 2023 look? Well, we are only 10.5 months away. And we are supposed to be long term investors (not traders). So lets put forward some numbers of how 2023 might look for Fairfax: net premiums earned = $19 billion x 93CR = $1.33 billion / 23 million shares outstanding = $58/share. Just from underwriting… Remember, shares are trading < $520 today.
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Yup… an improving CR is a big deal and definitely something to pay attention to. Q1 results will be key: was the low CR in Q4 an outlier or a sign of better things to come?

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What am i conveniently ignoring?

1.) losses from runoff: averaging about $200 million per year and not included in my analysis above… hopefully 2021 was a bit of a kitchen sink thing… so lets assume ongoing losses here = $100 million per year.

2.) not sure how the sale of 9.9% of Odyssey will flow through the financials… there is a cost; just not sure which buckets it will be paid from… anyone have any thoughts? (I am a sales/management guy not an accountant.)

Edited February 13, 2022 by Viking

lessthaniv · February 13, 2022

On 2/12/2022 at 5:10 AM, MMM20 said:

I wish Prem addressed the point more directly. 95% combined ratio = 5% net margin on $26B in float = $1B+ in income. Apply a 10x multiple to that and it's $10B in our intrinsic value calculation. I prefer to use more like ~2-3% normalized u/w profit in my thinking about this, but if it's ~5% then IV could easily be upwards of $1,500/share. Why not just lay that out for folks? Maybe b/c they want to do a Teledyne!

You appear to be crossing concepts here. CR speaks to underwriting profit/loss. The float is used for producing investment income. Total earnings is a combination of both.

Combined Ratio = (Claim-related Losses + Expenses) / Earned Premium.

So, (1 - CR) x Earned Premium will give you underwriting profit estimate.

Ex: Earned Premium @ $18B and CR @ 94%

.06 * $18B = ~ $1.1B from underwriting.

MMM20 · February 13, 2022

2 hours ago, lessthaniv said:

You appear to be crossing concepts here. CR speaks to underwriting profit/loss. The float is used for producing investment income. Total earnings is a combination of both.

Combined Ratio = (Claim-related Losses + Expenses) / Earned Premium.

So, (1 - CR) x Earned Premium will give you underwriting profit estimate.

Ex: Earned Premium @ $18B and CR @ 94%

.06 * $18B = ~ $1.1B from underwriting.

Y’all know what I mean. I am not an accountant. I am a lapsed cfa charterholder but really only ever retained the broad strokes in the first place (if anything). I am certainly not a great investor. But I’ve learned from WEB that we shouldn’t just count up the market value of assets and subtract liabilities to get to a reasonable estimate of intrinsic value… we gotta add in some value for capitalized normalized underwriting profit and adjust float liability to reflect economic reality.

And *if* FFH really can underwrite as profitably as they’ve shown over the long haul at this point… and with so much capital then effectively acting as negative interest rate debt… I can get to like ~$1,500/share intrinsic value without being the biggest bull on the forum.

That feels like a big change from 1-2 years ago, and I think the market’s still sleeping on it. Discount to IV is bigger today than it was a year ago, IMHO. I loaded up into the Dutch auction but have kept more shares than I started with a year ago.

Edited February 13, 2022 by MMM20

Viking · February 13, 2022

Well given it is Super Bowl Sunday today let's think big and audacious and Fairfax…

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In my previous post I suggested we might see Fairfax achieve a 94 combined ratio in 2022 - and that this might be a conservative estimate. I know, i know. That is NUTS. Crazy talk. EVERYONE KNOWS Fairfax always writes at a high ‘90’s CR. Just look at the past 5 years (see below for proof). And as recently as 2017 they wrote at 106.6. Barf. So a 94 CR is a pipe dream. Right? What if i told you there is a good chance they will actually achieve a 90CR. Consistently. In the coming years. Got your attention yet?

—————

I would appreciate feedback from others on the board. I have said repeatedly i am NOT an insurance guy. Or an accountant. I have followed Fairfax very closely for the past 20 years (i did go cold turkey from about 2012-2018). Below I have constructed a thesis. And i would appreciate hearing why my thesis is wrong. Or not. But please… specifics, logic, reasoning etc. So we can all learn something. And hopefully make some money along the way… Because if I am right there is some BIG money to make with Fairfax in the next 12-24 months.

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Just to set the table, let’s assume Fairfax delivers a 90CR in 2022. Yes, lets go crazy for a minute. What does that mean in cold hard underwriting earnings? US$18 billion in net earned premiums in 2022 x 0.10 (90CR) = $1.8 billion in underwriting income = $75/share (24 million shares). Holy shit Batman.

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But Fairfax achieving a 90CR is like Prem deciding to sell Blackberry… it just ain’t going to happen. Right? Well, not so fast… Not only is it possible, it also might be LIKELY...

OK, WHY? First we need to do some digging…

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I had a strange thought yesterday: can anything be learned from looking at Fairfax’s CR - going back 21 years. Can history teach us anything? And can those learnings help us understand where Fairfax’s CR might be headed in the future. Because understanding future earnings is the key to understanding how the share price is valued today and where it might be headed in the future. (We REALLY LIKE the set-ups where the shares are undervalued at the same time profitability is increasing.)

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So for fun lets look at Fairfax’s combined ratios for the past 21 years. Are there any patterns or is it completely random? Is there anything interesting going on?

Our starting point is 2001 and the combined ratio that year was 120.9. And of course that number was driven by 9-11.

Surprisingly (for me anyways) looking at Fairfax’s combined ratio for the past 20 years (2001-2021) you see 4 obvious cycles: hard market followed by soft market followed by hard market followed by soft market.

1.) from 2002-2007, Fairfax had 4 year stretch (over 5 years) where they achieved an average combined ratio of 97). I excluded the 2005 CR = 107.6 due to Hurricane Catrina - as it was an outlier. After all mother nature can always mess with an underlying trend for one year. This hard market bottomed at 97 because interest rates were high - US 10 year treasuries were yielding 5.5 to 6% (the ones on the books were yielding even more); corporates would have been higher yet. So with interest rates so high writing insurance business at a 97CR was very profitable.

2.) from 2008-2012, Fairfax had 5 year stretch where they achieved an average combined ratio of 105.

3.) from 2013-2016, Fairfax had a 4 year stretch where they achieved an average combined ratio under 92. This was a shocker for me. This stellar 4 year track record happened when I was not following Fairfax. (It's not the things you know that get you i trouble... its the things you think you know that ain't so.)

4.) from 2017-2021, Fairfax had a 5 year stretch where they achieved an average combined ratio of 99. This soft market peaked so much lower than the 2008-2012 soft market because interest rates are so much lower today - US 10 year treasuries are yielding 2%; corporates are modestly higher. With interest rates so low an average CR of 99 is not good.

So to summarize the past 20 years: the average CR was 97 (hard market) then 105 (soft market) then 92 (hard market) then 99 (soft market). Those are BIG, BIG swings.

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What are the lessons? The insurance business is very cyclical. But each cycle, once established, lasts for years - 4 to 5 years to be precise. Like clockwork.

And it appears as though we might be just beginning the next cycle change. From a soft market to a hard market. Fairfax reporting an 88CR in Q4 was like a school teacher ringing a bell. THE HARD MARKET IS NOW (FINALLY) SHOWING UP IN REPORTED RESULTS. You also see this when looking at results from other insurers. Because the insurance cycle is an industry event. The Q1 report will be important: if Fairfax reports a CR in the low 90’s then there is a pretty good chance that my thesis is correct and we are off to the races.

So what is a realistic CR for Fairfax to report in 2022 and the next few years? The last hard market saw them deliver an average 92CR with interest rates higher than they are today. So that suggests to me in this next hard market cycle we could see an average CR below 92 and possibly below 90. And that is because crazy low interest rates has made this hard market cycle even more firm than normal. Companies understand earnings from interest and dividends are going to remain challenged so they HAVE TO EARN MORE FROM UNDERWRITING IF THEY ARE GOING TO HIT THEIR RETURN OBJECTIVES. And earn their year end bonuses. And keep their shareholders happy.

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Now how do we know a low CR trend will last for years? It is because of how insurance companies set reserves. In soft markets the kitchen cupboard is allowed to run low, especially the last year or two (and reserve releases get smaller). No one wants to report a terrible CR (compared to peers) so they eat every last morsel they had previously squirrelled away in the pantry. In hard markets, especially in the first year or two, the kitchen cupboard needs to be completely re-stocked with groceries (it is empty after all and not having enough to eat is still fresh in everyones minds). So when a hard market begins reported CR’s are understated which allows reserves to be re-built. Think 2021. But once the restocking is done (and the pantry is now bursting with food) ALL THE PROFITS FROM THAT POINT FORWARD NOW FLOW TO THE CR. And the CR magically drops like a stone and stays low for years (remember, that pantry is full again… so we start to get above average reserve releases).

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Now where this gets confusing for investors is the lag from when insurance companies SAY WE ARE IN A HARD MARKET to when we SEE IT SHOW UP IN A FALLING CR. It looks to me, 9 quarters into the current hard market, that we likely have just passed the point where all the pantries have now been fully restocked and we should start to see really impressive CR’s being reported by insurance companies in the coming quarters. Like a CR of 88 from Fairfax in Q4. The really cool thing is it will come as a complete shock to most investors (the analysts have been banging the drum for a few quarters now). THE IMPROVING PROFITABILITY IS NOT PRICED IN TO THE STOCK. Well, at least it isn’t for Fairfax.

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CR Cat Losses Cat CR Events

2021 95 $1,203 7.5 Hurr Ida; Europe Fl; Texas WS

2020 97.8 $1,313 9.5 Covid; US Hurricanes

2019 96.9 $498 4.0

2018 97.3 $752 6.5

2017 106.6 $1,330 13.7 Hurr Harvey/Irma/Maria

2016 92.5 $353 4.6

2015 89.9

2014 90.8

2013 92.7

2012 99.9

2011 114.2 Japan earthquake; US storms

2010 103.5 Haiti earthquake

2009 99.8

2008 106.2 Hurricane Ike

2007 94

2006 95.5

2005 107.6 Hurricane Catrina

2004 97.5

2003 97.6

2002 101.5

2001 120.9 9-11

Edited February 13, 2022 by Viking

glider3834 · February 13, 2022

Talking about the narrative on Fairfax changing...

WATSA’S STILL GOT IT

Prem Watsa’s investing acumen powered Fairfax Financial in its latest quarter. While profit almost doubled in the company’s core property and casualty insurance and reinsurance operations, it was the US$938-million gain on investments that accounted for the lion’s share of earnings in the fourth quarter. For the year, investing gains surged to US$3.45 billion. We’ll keep an ear on what Watsa tells analysts in a conference call this morning.

https://www.bnnbloomberg.ca/the-daily-chase-blockade-hammers-auto-sector-prem-watsa-flexes-investing-smarts-1.1721969

Also SA fixed the earnings release revenue number

glider3834 · February 14, 2022

On 2/12/2022 at 11:07 AM, glider3834 said:

It starts to get nuts when you start putting valuation on the remaining 90% interest

If 10% sale resulted in $429 mil realised capital gain - a sale of remaining 90% (9 x $425 mil) could yield a further realised gain (over book value) of $3.825 bil - divide that by 23.9 mil shares & you get $160 per share which is 25% of Fairfax's market cap that is not reflected in Fairfax's book value.

Even if you take a conservative view & dial that number down - or because its OMERS or whatever - it is still going to be significant number & that is just Odyssey - what about the other insurers that Fairfax owns??

If you do a valuation of Fairfax based on float per common share you start to get a snapshot of that value (maybe theres a chart worth doing there

Odyssey had 28% NWP growth for 2021 & had 49.8% NWP growth in Q4! Its growing very fast & it has a very long, stable record of underwriting profitability. That really counts too!

correction - its US$160 so would be 30% of current share price

Parsad · February 14, 2022

On 2/12/2022 at 4:09 PM, Munger_Disciple said:

I have recently started looking at Fairfax mainly due to its cheapness (it should be cheaper than Berkshire as I consider it lower quality). I am trying to answer (to myself) if it as cheap as it looks. A few questions for the Fairfax experts:

1. We know Ajit Jain is the genius running Berkshire's insurance businesses. Who is the equivalent of Ajit at Fairfax (not just in terms of running the ops but the brain behind it)?

2. Is the float primarily from long tail liabilities or short tail?

3. It appears that annual premiums written by Fairfax is a much bigger % of its net worth (also float as a % of net worth) than at Berkshire which implies higher insurance leverage. This implies any negative surprises in the insurance business will have a much greater impact at Fairfax than at Berkshire. How are people comfortable with this leverage?

4. What is the succession plan at Fairfax? If something were to happen to Prem tomorrow, who will be running the show the day after?

Thanks in advance.

To supplement Viking's answers:

1) Yes, Andy Barnard. No comparison for Ajit Jain, but Andy is exceptional among insurance executives.

2) Yes, Fairfax on a percentage basis has more long-tail insurance than most insurers.

3) Yes, Fairfax uses both more insurance leverage and asset/equity leverage than Berkshire. Historically, Fairfax's insurers have written very good business from organically grown business, and 5-years out from some of the poorer insurers they bought and turned around. They have a very good record of releasing surplus capital when reserving for losses compared to the majority of insurers. They no longer acquire poor insurers and try to turn them around, thus the quality of the insurance businesses and their combined ratios have improved dramatically.

4) Peter Clark was recently appointed President. Before that, Paul Rivett was President before he retired. If something happened to Prem, Peter Clark would take over with advisement from Andy Barnard on the insurance side and Wade Burton on the investment side. Prem's son and daughter are directors of the company, similar to Susie Buffett and Howard Buffett at Berkshire...they maintain the company culture and directives their father laid out. Most of the directors at Fairfax are highly qualified and have been with the company for some time not unlike the directors at Berkshire Hathaway. Unlike Berkshire, Prem's holding company which controls the multiple voting shares in Fairfax, would retain those multiple voting shares and Prem's estate (likely his family) would retain control...a good thing if you trust Prem's family (which I absolutely do), and something an investor might be wary if if they don't.

Cheers!

Munger_Disciple · February 14, 2022

Thanks Viking & Parsad for your responses.

glider3834 · February 14, 2022

Just on Ukraine - if Russia does invade there is real risk of asset seizures (which happened in Crimea) & this would impact Fairfax but not in a material way from what I can see.

I genuinely hope the situation can get resolved peacefully obviously it would be terrible for the Ukrainian people.

For Fairfax I see these assets at risk -

Astarta - has large Ukrainian agri-industrial business - 28% ownership - Fairfax carrying value $65 mil

Fairfax Ukraine - 70% ownership - shareholder equity 2020 $90 mil (GWP $144 mil)

In terms of insurance liability exposure I would expect they would have the standard war exclusion clauses so not expecting issues on liability side but more the assets at risk - I don't know what assets Fairfax Ukraine has & whether they can be moved to friendlier territories. I am sure Fairfax has been making contingency plans either way.

Edited February 14, 2022 by glider3834

Viking · February 14, 2022

What is perhaps the ideal set up for a stock investment?

1.) growing earnings

2.) expanding multiple

3.) falling share count.

When all three metrics are improving at the same time the increase in a stocks price can be breathtaking. A very good recent example of this is Apple; its stock price has increased 400% in just the past 3 years.

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So for all investments it can be instructive to monitor shares outstanding. And the trend. Both past and, more importantly, what will likely happen in the future.

So how is Fairfax doing on the share count metric? An important shift has been happening the past 4 years. They have pivoted from being a serial issuer of shares (2015-2017) to being an aggressive buyer of their shares (2018-2021). And this trend picked up considerable steam in 2021 - the share count came down 8%. Share count has come down a total 14.4% the past 4 years which is a significant reduction. This trend will likely continue in the coming years. My guess is we could see share count at Fairfax come down another 1 million shares (4% of shares outstanding) in 2022; cost would be US$510 million which seems reasonable (especially given how undervalued the shares are). On the recent Q4 call Prem said share share repurchases were a top priority - although they would not be done at the expense of Fairfax’s financial position or if they hindered insurance subs ability to grow premiums in current hard market.

The US$10 dividend was paid in Q1 (cost US$240 million) so my guess is a majority of the buybacks will happen in Q2 to Q4.

—————

What can we learn from looking into Fairfax’s past? In short, Fairfax has used share issuance in recent years to fund its rapid international growth strategy:

2015: Brit

2016: ICICI Lombard, Eurolife, South Africa, Indonesia, Latin America, Eastern Europe

2017: Allied World (67%)

Over a 3 year period (2015-2017) Fairfax grew the share count by 6.6 million (at about US$455/share) to fund the many acquisitions listed above. Total weighted average shares outstanding increased 30% from 21.2 in 2014 to to 27.8 million in 2017.

—————

What do we know about Fairfax’s future plans? Fairfax has said pretty clearly that it will NOT be making any large acquisitions of new insurance companies moving forward. They are very happy with their global insurance foot print as it exists today. They are open to making smaller bolt on acquisitions (i.e. Singapore Re in 2021). And they likely will, over time, look to buy out minority partners in insurers they currently own (i.e. Eurolife in 2021).

—————

Dec 31, 2021 = 23.866 million shares outstanding

Share count has been reduced by 14.4% in past 4 years

Weighted average shares outstanding

2021 26.0 (2 million shares repurchased in Dec will show in 2022)

2020 26.2

2019 26.8

2018 27.2

2017 27.8 5.1 million at US$432; Allied (67%)

2016 23.1 1 million at C$735

- ICICI Lombard, Eurolife, Indonesia, S Africa, Lat Am, E Europe

2015 22.2 1 million at C650; Brit US$1.9 billion

2014 21.2

2013 21.2 1 million at C$431

2012 20.2

2011 20.4

2010 20.5

2009 20.0 2.9 million at US$347; Odyssey $1 billion

2008 17.5 Northbridge (37%) take private C$686 million

Edited February 14, 2022 by Viking

newtovalue · February 17, 2022

Fairfax acquires 5.4mm Fairfax India shares @ $12 US from existing shareholders! Buying FIH.U at 60% of a very tangible and hard book value - love this.

https://www.fairfax.ca/news/press-releases/press-release-details/2022/Fairfax-Announces-Acquisition-of-Additional-Fairfax-India-Shares/default.aspx

Edited February 17, 2022 by newtovalue

gfp · March 4, 2022

Annual Report is out now:

https://s1.q4cdn.com/579586326/files/doc_financials/2021/FF/WEBSITE-Fairfax-Financial's-2021-Annual-Report.pdf

Parsad · March 5, 2022

2 hours ago, gfp said:

Annual Report is out now:

https://s1.q4cdn.com/579586326/files/doc_financials/2021/FF/WEBSITE-Fairfax-Financial's-2021-Annual-Report.pdf

Terrific comprehensive letter! The insurance engine is wound up tight...increasing premiums through 2021, into 2022 and likely 2023...still only writing at 1x statutory surplus (can go to 1.5x)...float and investments per share is enormous leverage if they get it right!

$630 USD per share book value, balance sheet in very good position, with investment side ready to pounce better than almost any other insurer...should be trading somewhere between $800-950 CDN per share. Cheers!

nwoodman · March 5, 2022

An amazingly clear and coherent letter. The presentation of data and metrics is certainly a big improvement IMHO

Fairfax is in the best position I have seen in following the company for 10 years or so. They will cop it on the chin this quarter with declines in Eurobank but the general mix of investments means they will do well in other areas. Not exactly fortress Berkshire but moving in the right direction.

Underwriting will be key, if they can sustain those CRs then it should be game on. It’s been said before but the insurance business turn around is truly remarkable, an amazing job.

It was interesting to see that Blackberry only got three lines…

Fairfax 2022

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