Fairfax 2022

[Xerxes]

Just to capture the sequence of events since Dec 2021 till close of Q3, 2022. 
 

The big dollar increase in terms of investment in bonds/bills (funded from actual cash/cash equivalent) actually happened in Q1. 
 

In Q2 and Q3, I am thinking that the duration moved from 1.2 to 1.6, as treasury bonds/bills are getting recycled into longer dated ones. But the big thing was in Q1 in terms of fresh dry powder deployment.  
 

[maxthetrade]

The earnings call transcript is now available:

https://seekingalpha.com/article/4553283-fairfax-financial-holdings-limited-frfhf-q3-2022-earnings-call-transcript

 

[glider3834]

On 10/25/2022 at 11:06 AM, glider3834 said:

IRDAI has proposed new 2022 regulations (13/10) https://www.irdai.gov.in/admincms/cms/whatsNew_Layout.aspx?page=PageNo4834&flag=1 & they include changing the 'Indian Promoter' definition removing this requirement that a Company cannot be a subsidiary.

 

If these are implemented as proposed, then I think it would allow Fairfax to get over this issue described above & be able to convert its convertible preferred shares to take control of Digit & recognise any MTM gain where applicable.

 

2022 exposure draft 

 

 

 

original 2000 regs 

 

 

 

@nwoodman I jumped the gun on this one - it looks like these draft regs still exclude subsidiary from being a promoter unless it meets certain criteria - anyway these draft regs will need to go through consultation process & are not finalised - so lets see what happens - on 3Q call sounds like FFH are going to explore all legal options to exercise their convertible preferreds 

[Viking]

Below are some answers to the questions i asked before earnings were released. How did Fairfax do? In short, very well. The earnings power of this company keeps increasing every quarter. At US$510, the stock is wicked cheap. The outlook for Fairfax has rarely ever looked better. That last statement is not hyperbole. 

 

Insurance: 

1.) does top line growth remain close to 20%?

- Net premiums written increased 18.6%. Simply outstanding. And poised to continue into 2023. Odyssey Group = +32%. Crum and Forster = +34.5%. 

2.) what is Q3 CR? How much over 100?

- CR came in at 100.3. Catastrophe losses were $803 million = 15.0 CR points. CR, ex cat losses, was 85.3... the lowest such number in Fairfax's history? 

- Losses from Hurricane Ian were $560.6 million.

- YTD CR = 96.0. Was 97.3 YTD 2021. My guess is full year 2022 CR comes in around 95 which will deliver record underwriting profit. 
- expense ratio came in 1.7 points lower than PY.

3.) hard market expected to run well into 2023? Expectations for hard market for reinsurance?

- Yes. And the hard market in reinsurance should power outsized growth at Odyssey Group in 2023 (in 30% growth attainable?). 
Other developments:

- We have a new CEO at Brit. Former CEO recently stepped down due to health reasons (he will remain with Fairfax in an advisory role) - we all hope he gets better! Brit, like lots of Lloyds insurers, has been having its challenges for the past couple of years. My guess is Andy Barnard will find a way to get Brit back on track. Interesting that net of Ki, growth at Brit was low single digit. 

Bond portfolio

4.) what kind of increase do we see in interest income? What is new run rate for interest and dividend income? (Was $950 million end of Q2.)

- interest and dividends came in at $256.5 million (versus $167.2 million in Q3 2021).
- The new run rate for interest and dividend income is $1.2 billion = 3.2% yield on $37 billion portfolio. WOW!

5.) what changes, if any, do we see in bond portfolio? Buying and muni’s? 

- Fairfax has started to move out a little in duration. Great news. Hopefully we see more of this in Q4.

- "During the third quarter of 2022 the company used existing cash and the proceeds from sales and maturities of short dated investments to purchase $7.2 billion of U.S. treasuries and Canadian government bonds, and short dated high quality corporate bonds, benefiting interest and dividend income."

6.) what is average duration? (1.2 years at June 30)

- average duration increased to 1.6 years on fixed income portfolio.

7.) what is amount of mark to market loss? Another US$400 million?

- mark to market losses on bonds was only $242.4 million. Impressive given the significant increase in interest rates across the curve in Q3. 

- "Net losses on bonds of $242.4 million included net losses on U.S. treasuries of $193.8 million and net losses of $90.0 million on corporate and other bonds (principally U.S. and other corporate bonds), partially offset by net gains on U.S. treasury bond forward contracts of $59.7 million."

 

Equity Portfolio 

8.) what is amount of mark to market loss? (My estimate is around $300 million)

- market to market losses on equities was $141.9 million. Much lower than I expected. The stocks I track were off $300 million. So Fairfax did something of significance to offset a much bigger loss. What? No idea. It will be interesting to see what the Q3 13F reveals. 

- "Net losses on equity exposures of $154.8 million was primarily comprised of unrealized depreciation of common stocks, equity warrants and convertible bonds and net losses on long equity total return swaps. At September 30, 2022 the company continued to hold equity total return swaps on 1,964,155 Fairfax subordinate voting shares with an original notional amount of $732.5 million (Cdn$935.0 million) or approximately $372.96 (Cdn$476.03) per share, on which the company recorded $82.3 million of net losses in the third quarter of 2022 and has recorded cumulative net unrealized gains of $233.7 million since inception."

9.) any commentary on completed Recipe take private? Funded how?

- done. No commentary of how it was funded.

10.) any commentary on Atlas take private?

- minimal commentary. Fairfax will not be putting new money in to Poseidon (other than converting about $100 million in existing debentures). 

 

Other

11.) share of profits of associates? $200 million?

- came in at $241.5 million. Was $172.2 million in Q3 2021. 

12.) Book value? (Was US$588/share at June 30.)

- came in at $570. Outstanding. Add in proceeds from the pet insurance sale ($40) and BV = $610. With the shares trading at $510, P/BV = 0.84 is stupid low. 

- BV also reflects spike in bond yields AND bear market lows in mark to market equities. BV is not overstated.  

13.) share buybacks during quarter?

- Fairfax bought back 210,000 shares in Q3 = 0.9%

- "There were 23.6 million and 25.9 million weighted average common shares effectively outstanding during the third quarters of 2022 and 2021 respectively. At September 30, 2022 there were 23,445,778 common shares effectively outstanding."

- "At June 30, 2022 there were 23,654,827 common shares effectively outstanding."

14.) increase in debt in Q3 of $750 million. How much of minority interest in Allied is purchased? What is outstanding balance?

- "On September 27, 2022 the company increased its ownership interest in Allied World to 82.9% from 70.9% for total consideration of $733.5 million, inclusive of the fair value of a call option exercised and an accrued dividend paid, and recorded a loss in retained earnings of $228.1 million."

15.) capital allocation priority moving forward?

i.) financial stability of company

ii.) fund growth of subs in hard market

iii.) buy back Fairfax stock

- Holding company finished Q3 with $900 million in cash which is below $1 billion minimum. Additional $900 million in proceeds from pet insurance sale are now at hold co = $1.8 billion in cash.

- listening to Prem on the conference call I am not sure if we get another dutch auction. I think NCIB re-purchases might be what they do moving forward.  

 

Updates/Commentary:

16.) pet insurance sale closed Oct 31: proceeds to be used for?

- See previous comment above. 

17.) Resolute Forest Products sale: to close when? 2023?

- 1H 2023. Valuation was updated in Q3 so no increase will be booked when sale closes.
18.) Stelco dutch auction: did Fairfax be tender any shares? (Likely not.)

- no commentary. Likely no. 

19.) update: regulatory approval to take control of Digit? Status of IPO?

- regulatory approval will happen. Timing is uncertain as Fairfax needs to figure out a solution and get regulators to approve it. 

—————
Looking ahead, is Fairfax on glide path to earn $2 billion from underwriting income + interest and dividend income in 2023?

- NO. Fairfax is not on a glide path to earn $2 billion. They are on a glide path to earn something closer to $2.4 billion from underwriting income + interest and dividend income in 2023 = $100/share. 

Edited November 6, 2022 by Viking

[This2ShallPass]

7 hours ago, Viking said:

They are on a glide path to earn something closer to $2.4 billion from underwriting income + interest and dividend income in 2023 = $100/share. 

Thanks Viking for the great update. Earning $100/sh, stock is unloved, but still unwilling to buyback shares

 

Like someone posted maybe they're getting ready to bid for IDBI, looking to turnaround another company and wait another 5-10 years? Is there a chance Prem is in empire building mode and trying to cement his legacy vs. doing what he said. I'm coming around to the idea that this guy is not trustable. Here's his quote from Q2

 

Q: "What are your thoughts as to what to do with this $1.2 billion in cash from that Pet Insurance deal?"

 

Prem: " And so we look at obviously, buying back our stock, that'll be the number one thing that we'd look at, but not at the expense of our financial position. "

[Viking]

56 minutes ago, This2ShallPass said:

Thanks Viking for the great update. Earning $100/sh, stock is unloved, but still unwilling to buyback shares

 

Like someone posted maybe they're getting ready to bid for IDBI, looking to turnaround another company and wait another 5-10 years? Is there a chance Prem is in empire building mode and trying to cement his legacy vs. doing what he said. I'm coming around to the idea that this guy is not trustable. Here's his quote from Q2

 

Q: "What are your thoughts as to what to do with this $1.2 billion in cash from that Pet Insurance deal?"

 

Prem: " And so we look at obviously, buying back our stock, that'll be the number one thing that we'd look at, but not at the expense of our financial position. "

Fairfax did re-purchase 0.9% of shares outstanding in Q3. That was a pretty good number given Q3 is the high catastrophe quarter. If they keep this pace up that would be close to 4% over 12 months… I think they will continue to buy back shares in Q4, perhaps something in the 1.5-2% range. I would love to see them keep on doing this every quarter = 6 to 8% over 12 months. Add in a 2% dividend and that is a pretty solid shareholder return of 8-10%… especially if they can continue it for a couple of years.

—————

We all, including Fairfax, have learned more over the past 3 months (since the Q2 call). I am not sure anyone expected the re-insurance market to harden like it has. Or for the hard market in insurance to remain this hard. 
—————

Bottom line, Prem has been saying for years that capital allocation priorities are:

1.) maintain solid financial position

2.) grow insurance top line in hard market

3.) buy back stock

We will see what they do with capital allocation in Q4. It is not a concern for me (although i will be paying attention).

[This2ShallPass]

19 hours ago, Viking said:

Fairfax did re-purchase 0.9% of shares outstanding in Q3.

I was thinking about a SIB Viking. I'm keeping it very simple, if you'll be earning $100/sh, your stock is at $500 and you're getting $1B..you do a buyback. Their financial position is solid.

 

I bought Fairfax 10-12 years ago, have held it patiently through their mistakes and even added more. I'm the kind of long term shareholder they should reward at some point (in the really long term, we're all dead).

 

Forget the market, even prominent value investors who would have scooped up this bargain are buying. Not even Francis Chou. That to me suggests there's a big trust issue. If they keep eroding that trust, even in people like me who have really believed in them, they will never have the kind of shareholder base that Berkshire or Markel has.

 

[Parsad]

1 hour ago, This2ShallPass said:

I was thinking about a SIB Viking. I'm keeping it very simple, if you'll be earning $100/sh, your stock is at $500 and you're getting $1B..you do a buyback. Their financial position is solid.

 

I bought Fairfax 10-12 years ago, have held it patiently through their mistakes and even added more. I'm the kind of long term shareholder they should reward at some point (in the really long term, we're all dead).

 

Forget the market, even prominent value investors who would have scooped up this bargain are buying. Not even Francis Chou. That to me suggests there's a big trust issue. If they keep eroding that trust, even in people like me who have really believed in them, they will never have the kind of shareholder base that Berkshire or Markel has.

 

 

I don't think you really know what you are talking about.  Forget trust...Francis would give his left nut to Prem if Prem requested it.  I know...because I know both Prem and Francis very well!  Francis bought 20,000 shares of Fairfax at $3 when Prem bought the company.  Francis has never sold a share.  

 

There are two things going on here: 

• You have an economic environment that investors have to be very careful in. 
• Fairfax's $100 per share in income is not certain outside of next year based on a 1.6 year average duration of the bond portfolio...and that's with an average catastrophe year in 2023.

Prem has always said that the priorities in order are...being financially sound, growing the insurance business in a hard market and then buybacks if the stock is undervalued. 

 

He's done just that over the last 4 years, retiring roughly 15% of the stock plus buying up another 8% through the total return swaps.  In essence, he's retired 23% of the stock in four years.  He probably will have retired 30% of the float by the time the market values the stock where it doesn't make sense to buy more, as it would not be accretive to intrinsic value.

 

I would also give my left nut to Prem if he asked, and I haven't bought any more Fairfax since the beginning of the pandemic when I put 60% of my portfolio in FFH...trust issues?!  While the stock is cheap here, it isn't dirt cheap as some of you think.  The market is also offering some very interesting alternatives if you are a distressed investor...including in the bond market where you could get some equity like returns going forward with none of the risk. 

 

So while I understand your pain as a long-term shareholder of FFH, I think it's crazy to chalk it up to trust issues.  Shareholders will be rewarded soon...patience is required...it's coming.  Cheers!  

[SafetyinNumbers]

28 minutes ago, Parsad said:

 

I don't think you really know what you are talking about.  Forget trust...Francis would give his left nut to Prem if Prem requested it.  I know...because I know both Prem and Francis very well!  Francis bought 20,000 shares of Fairfax at $3 when Prem bought the company.  Francis has never sold a share.  

 

There are two things going on here: 

• You have an economic environment that investors have to be very careful in. 
• Fairfax's $100 per share in income is not certain outside of next year based on a 1.6 year average duration of the bond portfolio...and that's with an average catastrophe year in 2023.

Prem has always said that the priorities in order are...being financially sound, growing the insurance business in a hard market and then buybacks if the stock is undervalued. 

 

He's done just that over the last 4 years, retiring roughly 15% of the stock plus buying up another 8% through the total return swaps.  In essence, he's retired 23% of the stock in four years.  He probably will have retired 30% of the float by the time the market values the stock where it doesn't make sense to buy more, as it would not be accretive to intrinsic value.

 

I would also give my left nut to Prem if he asked, and I haven't bought any more Fairfax since the beginning of the pandemic when I put 60% of my portfolio in FFH...trust issues?!  While the stock is cheap here, it isn't dirt cheap as some of you think.  The market is also offering some very interesting alternatives if you are a distressed investor...including in the bond market where you could get some equity like returns going forward with none of the risk. 

 

So while I understand your pain as a long-term shareholder of FFH, I think it's crazy to chalk it up to trust issues.  Shareholders will be rewarded soon...patience is required...it's coming.  Cheers!  

I’m surprised you don’t think the stock is dirt cheap. I get that the float isn’t as valuable in a low rate environment but surely it’s value has grown exponentially in the past year but none of that value is reflected in the share price. That being said, the right thing to do is grow premiums while insurance markets are hard and buy back stock with excess capital as they are doing.
 

Frankly, the growth is another reason why the stock is so cheap. To be at such a big discount to book, with 260% float to market cap, 4% interest rates, an incredibly hard reinsurance market where most of the peers have had their balance sheets hammered by higher interest rates and still trade at a discount to book seems dirt cheap.

[Parsad]

58 minutes ago, SafetyinNumbers said:

I’m surprised you don’t think the stock is dirt cheap. I get that the float isn’t as valuable in a low rate environment but surely it’s value has grown exponentially in the past year but none of that value is reflected in the share price. That being said, the right thing to do is grow premiums while insurance markets are hard and buy back stock with excess capital as they are doing.
 

Frankly, the growth is another reason why the stock is so cheap. To be at such a big discount to book, with 260% float to market cap, 4% interest rates, an incredibly hard reinsurance market where most of the peers have had their balance sheets hammered by higher interest rates and still trade at a discount to book seems dirt cheap.

 

Fairfax should trade at a larger discount than Berkshire or Markel.  The reason being is that Fairfax uses more leverage...more asset to equity leverage...more debt.  And that works great during a hard market, low catastrophe year, but will also hit harder when premium prices aren't adequate and catastrophe losses are huge.  It's why most reinsurers trade at a larger discount than general insurers.  

 

Is Fairfax trading at a reasonable discount that would make it a good investment going forward.  Yes.  Are economic conditions and insurance markets set for Fairfax to do well.  Yes.  So Fairfax should do well...probably better than most insurers going forward for a couple of years.  Is it dirt cheap?  No.  Cheers!

 

 

[This2ShallPass]

1 hour ago, Parsad said:

Forget trust...Francis would give his left nut to Prem if Prem requested it.

All I know is Francis hasn't bought Fairfax in his funds. If he trusts Prem so much, then why is 35% of his main fund in Berkshire and 0% in Fairfax (http://choufunds.com/pdf/Asso 2022 Q2 Holdings.pdf). I used him as an example as he has Fairfax connections, but why haven't many value investors bought Fairfax (only one is Southeastern)??

 

I brought up trust as that has been discussed a lot in this board (though a while back) with regards to Prem. Trust is built on doing what you say. My concern is only based on the Pet insurance proceeds and in Q2 he clearly said buyback would be the #1 priority. The markets haven't hardened that much in Q3 for that to change. And yes, I'll choose whom to trust with my money...right now that's starting to erode.

 

[Viking]

5 hours ago, This2ShallPass said:

I was thinking about a SIB Viking. I'm keeping it very simple, if you'll be earning $100/sh, your stock is at $500 and you're getting $1B..you do a buyback. Their financial position is solid.

 

I bought Fairfax 10-12 years ago, have held it patiently through their mistakes and even added more. I'm the kind of long term shareholder they should reward at some point (in the really long term, we're all dead).

 

Forget the market, even prominent value investors who would have scooped up this bargain are buying. Not even Francis Chou. That to me suggests there's a big trust issue. If they keep eroding that trust, even in people like me who have really believed in them, they will never have the kind of shareholder base that Berkshire or Markel has.

@This2ShallPass i fully agree that ‘trust’ issues are one of the primary reason for Fairfax’s current super cheap valuation. The ‘equity hedge’ bet was an epic fail. Fairfax’s communication over the years at times has been poor. And Prem has his own unique style.
 

However, i have followed Fairfax pretty closely for 20 years. And the communication issues have been around all 20. They ebb and flow. Fairfax is not going to change in this regard. It is a fact of investing in Fairfax. And i am ok with that as an investor. It is something i have no control over.  For me, today, the benefits far out-weight the risks. So i am happy to own a significant number of Fairfax shares.

 

i view the share buyback topic differently than you. My view is Fairfax has delivered on this front over the past couple of years. They exceeded my expectations in Q3. I am pretty certain they will be buying back shares in Q4. Is it dutch auction or bust? No. Not for me. I will wait and see what they do. If they don’t repurchase a bunch of shares what do they do instead? They have so many good options available today.
 

I like, taken as a whole, the decisions the company has made the past 5 or so years. I reaaly like how the company is positioned today. Given the performance i have seen in recent years, i am going to cut the company some slack. 

Edited November 7, 2022 by Viking

[Viking]

1 hour ago, Parsad said:

Is it dirt cheap?  No.  Cheers!

@Parsad i almost spit up my drink when i read that   what do you think Fairfax will earn in a ‘normal’ year moving forward? 
 

My guess is more than US$100/share. With shares trading at $510 that puts the PE at about 5x. That is dirt cheap to me. We are still in a hard market which means top line growth will be solid in 2023. Interest rates are expected to continue increasing into 2023. Fairfax’s various equity holdings look well positioned. This suggests to me that $100/share in normalized earnings will likely increase nicely in the future.

 

Yes, with stock markets selling off significantly in 2022, lots of stocks are much cheaper. However, despite the sell off, i don’t see many that are cheaper than Fairfax (or even close).

Edited November 7, 2022 by Viking

[This2ShallPass]

17 minutes ago, Viking said:

I like, taken as a whole, the decisions the company has made the past 5 or so years. I reaaly like how the company is positioned today.

Fully agree on these. That's why I have been holding / adding, even the last few weeks I started nibbling again ~460s.

[Parsad]

42 minutes ago, Viking said:

@Parsad i almost spit up my drink when i read that   what do you think Fairfax will earn in a ‘normal’ year moving forward? 
 

My guess is more than US$100/share. With shares trading at $510 that puts the PE at about 5x. That is dirt cheap to me. We are still in a hard market which means top line growth will be solid in 2023. Interest rates are expected to continue increasing into 2023. Fairfax’s various equity holdings look well positioned. This suggests to me that $100/share in normalized earnings will likely increase nicely in the future.

 

Yes, with stock markets selling off significantly in 2022, lots of stocks are much cheaper. However, despite the sell off, i don’t see many that are cheaper than Fairfax (or even close).

 

Let's use the historical average for ROE over the last 20 years.  Book at the end of 2021 was $630.60.  Book at the end of 2001 was $117.03.  That's a ROE of 8.8% annualized.

 

Using current book of $570 ending Q3 2022 times 8.8% equals $50 per share.  P/E then equals last week's low of $480 divided by $50 or 9.6.  Cheap, but not dirt cheap.

 

Do I expect Fairfax to do better over the next 20 years on ROE compared to the last 20 years...yes!  And I've also excluded the increase in book value expected in Q4.  So that's your margin of safety. 

 

I think you'll do very well buying Fairfax today...that's why I still have nearly 30% of my portfolio in Fairfax.  But it certainly isn't as cheap as it was during the pandemic when it was a no-brainer.  Cheers!  

 

 

[glider3834]

3 hours ago, Parsad said:

 

Let's use the historical average for ROE over the last 20 years.  Book at the end of 2021 was $630.60.  Book at the end of 2001 was $117.03.  That's a ROE of 8.8% annualized.

 

Using current book of $570 ending Q3 2022 times 8.8% equals $50 per share.  P/E then equals last week's low of $480 divided by $50 or 9.6.  Cheap, but not dirt cheap.

 

Do I expect Fairfax to do better over the next 20 years on ROE compared to the last 20 years...yes!  And I've also excluded the increase in book value expected in Q4.  So that's your margin of safety. 

 

I think you'll do very well buying Fairfax today...that's why I still have nearly 30% of my portfolio in Fairfax.  But it certainly isn't as cheap as it was during the pandemic when it was a no-brainer.  Cheers!  

 

 

I think you are using 8.8% as a sort of worst case scenario but it is really skewed by the hedges

 

If you take out period they were 100% equity hedged, CAGR% in in book value per share is higher

2002-2010 (9 yrs) 13.9%

2011-2016 - 100% equities hedged

2017-2021 (5yrs) 13.1% (including dividends)

 

Plus also factor in pre-tax investment yield (Interest & dividends) was 3.6% in 2002-2010 period but fell to 1.8% in 2017-2021. That impacted BVPS growth. We are now back to 3.2% - hopefully they can continue to move yield & duration higher.

 

 

Edited November 7, 2022 by glider3834

[Xerxes]

Pershing Square is trading at 30% or so discount to NAV, is it a “legacy trust” issue going back to the go-go days of Valeant now like 5-6 years ago.  

[UK]

4 hours ago, Parsad said:

 

Let's use the historical average for ROE over the last 20 years.  Book at the end of 2021 was $630.60.  Book at the end of 2001 was $117.03.  That's a ROE of 8.8% annualized.

 

Using current book of $570 ending Q3 2022 times 8.8% equals $50 per share.  P/E then equals last week's low of $480 divided by $50 or 9.6.  Cheap, but not dirt cheap

 

I think their patience and this years massive change in bond yields provides opportunity for FFH for the first time in like 10 years to make their 15 per cent return target actually work without any heroic assumptions? That would lead to a at least 1.5 BV or 10-12 normalised PE and vs current price we have almost 50 MoS? If it is cheap or dirty cheap, I do not now, maybe not dirty cheap but quite cheap or cheap enought for such a company. Now we are discussing linguistic like those analysing fedspeach:)

[UK]

26 minutes ago, Xerxes said:

Pershing Square is trading at 30% or so discount to NAV, is it a “legacy trust” issue going back to the go-go days of Valeant now like 5-6 years ago.  

 

I would quess this has more to do with 1. their fees 2. listing place / tax treatment than with trust? 

[petec]

10 hours ago, This2ShallPass said:

My concern is only based on the Pet insurance proceeds and in Q2 he clearly said buyback would be the #1 priority.

 

I don't think he has EVER said buybacks were the no1 priority. It has always been 1) financial soundness, 2) premium growth in a hard market, because premiums are sticky, and only 3) buybacks.

 

In addition to that, the pet proceeds had not been received in q3 so it is a little unfair to expect them to have spent them in q3.

 

What they DID do is buy back 0.9% of the shares, making 15% plus the TRS in recent years, AND they bought in 12% of Allied, which is a buyback of sorts although you may not like the value trade there quite so much.

 

Prem is guilty of many things but I think he is executing on his buyback promise.

 

What REALLY stuns me is that premiums are up 60% in 3 years. I thought a hard market was coming, but wow.

 

 

[petec]

9 hours ago, Viking said:

i almost spit up my drink when i read that   what do you think Fairfax will earn in a ‘normal’ year moving forward? 
 

My guess is more than US$100/share

 

I tend towards Parsad's view that this is cheap, but not dirt cheap. My main worry centres around inflation. Yes, interest income is up because rates are up. But inflation is up more. Holders of fixed income securities are losing money faster than they were before. Fairfax's liabilities, however, are inflation linked. We will have to see how that pans out over time, but I am nervous about assuming that the stock is on 5x sustainable earnings.

 

Still own plenty of it though!

[Viking]

7 hours ago, Parsad said:

 

Let's use the historical average for ROE over the last 20 years.  Book at the end of 2021 was $630.60.  Book at the end of 2001 was $117.03.  That's a ROE of 8.8% annualized.

 

Using current book of $570 ending Q3 2022 times 8.8% equals $50 per share.  P/E then equals last week's low of $480 divided by $50 or 9.6.  Cheap, but not dirt cheap.

 

Do I expect Fairfax to do better over the next 20 years on ROE compared to the last 20 years...yes!  And I've also excluded the increase in book value expected in Q4.  So that's your margin of safety. 

 

I think you'll do very well buying Fairfax today...that's why I still have nearly 30% of my portfolio in Fairfax.  But it certainly isn't as cheap as it was during the pandemic when it was a no-brainer.  Cheers!  

 

@Parsad Historical information is useful only to the extent that it helps inform an investor what future results will be. If past results do not help an investor estimate what future earnings will be then they are worse than useless. Because they will give an investor an inaccurate view of future results. And this will lead to poor decisions regarding share ownership.

 

My  view is your analysis above does very little to actually inform an investor what Fairfax earnings or growth in BV are likely to be in the next 1, 2 and 3 years. And I say this with all due respect (I am not trying to be adversarial). There has been enormous changes at Fairfax the past 5-6 years. The company today does not remotely resemble the company that existed in 2015, let alone 2010. And, most importantly for an investor, its future earnings power is completely misunderstood. Because investors are still stuck in the past.

 

Druckenmiller suggests an investor should look out 12-18 months and find situations where the narrative is completely wrong (leading to a stock being mis-priced today). I believe Fairfax is a great example today of where the narrative is completely wrong. Investors, largely looking through the rear view mirror, are way underestimating the earnings momentum at Fairfax that has been building for the past 5-6 years.

[Viking]

At its core, Fairfax Financial is an insurance company. With Q3 results just reported we can update some estimates for Fairfax that capture actual Q3 results and the outlook for 2023. The size of Fairfax's insurance businesses have increased dramatically. Over the past 8 years net premiums earned have increased 224% from $5.98 billion in 2014 to $19.4 billion in 2022 (my estimate) for a compounded growth rate of 16% per year. On a per share basis Fairfax has grown net premiums earned by 194% = 14% per year compounded over the past 8 years. The share count is up 10.4% over this time.

 

What has driven this significant growth? For the first 3 years acquisitions drove a large part of the growth: Brit (2015), International (2016) and Allied World (2017). For the past 5 years (2018-2022) the growth has been organic and driven by the hard market of the past 3 years. Looking back, Fairfax timed their large insurance acquisitions perfectly (right before the hard market set in).

 

The hard market in insurance looks set to continue for a 4th year and is spreading to reinsurance (which is a big business for Fairfax). 2023 could see net premiums earned grow to $22.3 billion, up $3 billion, or 15%, from 2022.

 

Why do we care what net premiums earned are? Because this is a key input in determining underwriting profit. And underwriting profit is one of the critical inputs in determining what an insurance company is worth. Fairfax is on pace to earn an underwriting profit of $970 million in 2022 ($41/share). A new record. My estimate for 2023 is for Fairfax to earn $1.1 billion in 2023 ($48/share). Another record. The previous record was $801 million in 2021 ($31/share). Bottom line, the significant growth in net premiums earned the past 8 years is resulting in Fairfax earning record underwriting profit. And the record underwriting profit party is just getting started. 

 

Now we all know financial markets are extremely efficient when pricing equities. Everything that is know about a company is already priced into its equity price. (Yes, I say this in jest So where was Fairfax stock trading at Dec 31 2014? About US$510. Where is Fairfax stock trading today? US$525. Wow! Really? So was Fairfax overvalued in 2014? Or is Fairfax undervalued Nov 7, 2022?

 

Of course, we can’t just look at net premiums earned and underwriting profit to answer this question. Future posts will look into the trend of interest and dividend income and returns on the equity holdings.

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Note: my numbers above do NOT include runoff. My guess is the cost of runoff will come in at about $150 million per year.

Edited November 7, 2022 by Viking

[Parsad]

8 hours ago, glider3834 said:

I think you are using 8.8% as a sort of worst case scenario but it is really skewed by the hedges

 

If you take out period they were 100% equity hedged, CAGR% in in book value per share is higher

2002-2010 (9 yrs) 13.9%

2011-2016 - 100% equities hedged

2017-2021 (5yrs) 13.1% (including dividends)

 

Plus also factor in pre-tax investment yield (Interest & dividends) was 3.6% in 2002-2010 period but fell to 1.8% in 2017-2021. That impacted BVPS growth. We are now back to 3.2% - hopefully they can continue to move yield & duration higher.

 

 

 

True.  But they also benefitted heavily by betting against mortgage backed securities in 2008.  In my mind, the lack of investment during the last 10 years when the markets were doing great is also offset by the opportunities they have presented themselves now...negligible losses in equity, hard market for insurance, ton of opportunity. 

 

That's probably why institutional investors shy away from Fairfax.  Not trust issues, not because they don't understand the business, but consistency has been lacking in the last 20 years.  They've had some very significant peaks and valleys. 

 

Leadership and talent are legit!  Prem is a real investing rockstar and in my opinion a legitimate heir apparent to Buffett in terms of an investing mentor and leader.  But now they need to be consistent...rock solid...grow Fairfax the way they always meant to be.  I shouldn't complain, since I've been a beneficiary of Fairfax's volatility over the last 20 years...but it is now time for them to take FFH to another level.  Cheers!

[Parsad]

4 hours ago, Viking said:

 

@Parsad Historical information is useful only to the extent that it helps inform an investor what future results will be. If past results do not help an investor estimate what future earnings will be then they are worse than useless. Because they will give an investor an inaccurate view of future results. And this will lead to poor decisions regarding share ownership.

 

My  view is your analysis above does very little to actually inform an investor what Fairfax earnings or growth in BV are likely to be in the next 1, 2 and 3 years. And I say this with all due respect (I am not trying to be adversarial). There has been enormous changes at Fairfax the past 5-6 years. The company today does not remotely resemble the company that existed in 2015, let alone 2010. And, most importantly for an investor, its future earnings power is completely misunderstood. Because investors are still stuck in the past.

 

Druckenmiller suggests an investor should look out 12-18 months and find situations where the narrative is completely wrong (leading to a stock being mis-priced today). I believe Fairfax is a great example today of where the narrative is completely wrong. Investors, largely looking through the rear view mirror, are way underestimating the earnings momentum at Fairfax that has been building for the past 5-6 years.

 

I fully agree with you.  My methodology and assumptions is my "margin of safety".  It's kept me from being one of those Fairfax investors complaining about their lack of consistency and how my returns suck compared to Berkshire, Markel and the S&P 500 because I've held the stock for 20 years.  I've made money (lots) every time I've bought Fairfax and each time I've gone into the stock in a huge way...2003 (90% of my portfolio)...2007 (60% of my portfolio)...March 2020 (60% of my portfolio). 

 

I've never looked backwards or historically at Fairfax when buying it...that was to give you some measure of value.  My bets were always when I thought they were positioned well for the future and were cheap on a price to book basis.  I'm just saying that investors should look historically to develop their margin of safety, and then bet on the business based on how they will do going forward...but always keep that margin of safety as your measuring stick.  It will protect your portfolio! 

 

One other note.  Have any of you seen Prem put another $150M of his personal money into the stock lately?  No, because he knew it was stupid cheap back then.  That $150M will be $300M very soon!  Bet big, bet boldly when you know things are dirt cheap!  Cheers!