Fairfax 2022

[Thrifty3000]

11 hours ago, Thrifty3000 said:

It just hit me what the next few chess plays might look like once Sokol is drawn even deeper into the FFH sphere after the Atco deal.

First, Sokol gets a board seat at Fairfax, and it comes with some kind of rich, share-based, incentive to be more involved with operations and deal-making than just being a board member (but, it won't come with a formal operational title).

 

Second, within 5 years we'll start seeing some sweetheart deals involving both BRK and FFH, because at that point Greg Abel will be rewarding his old buddy D. Sokol for sourcing the much-needed ideas.

To further expound, BRK will probably be a ready buyer of ATCO for $10+ billion in a few years.

[backtothebeach]

Not much love in the market for Fairfax these days ...

 

 

[cwericb]

I was just thinking the same thing

 

[value_hunter]

Seems every move Fairfax takes the market views as negative. No trust at all.  

[Viking]

1 hour ago, backtothebeach said:

Not much love in the market for Fairfax these days ...

 

 

 

I agree. However, most insurers have been dead money for the past 6 months or so. Likely driven by concerns: 1.) the hard market is coming to an end 2.) high inflation increasing loss cost trends. 

 

What i focus on is what is going on under the hood. Looking at the past 12 months Fairfax is hitting the ball out of the park. With Fairfax shares closing today at US$511 that is called wonderful opportunity. So I was buying more late today (redeploying proceeds from lightening up on oil yesterday).

 

Fairfax is like a coiled spring. That just keeps on getting coiled tighter and tighter. The stock price will respond. In Oct 2020 Fairfax was trading US$260 and 7 months later it was up 75% to $460. Everyone who followed the company KNEW it was crazy cheap at $260 (it traded at this level for 7 months so people had time to pull the trigger). Most did not buy.

 

No doubt in my mind Fairfax is crazy cheap today at US$511. I am also convinced the shares will be much higher at some point in the next 3 years. What I don't know? When Mr. Market will drive the next spike in the stock price. As long as Fairfax continues to execute well and deliver exceptional results I will be patient. 

[StubbleJumper]

My disappointment is that the stock has been more buoyant than I would like.  Mr Market really didn't hate the headline EPS number that they released two weeks ago.  Here we are halfway through August and all is quiet in the Atlantic basin, so the typical angst about hurricanes hasn't affected the market at all.  How is a guy supposed to get a bargain around here?!!  Maybe if Jen Allen would resign quietly with little explanation the stock would sell off as they always seem to do when the CFO suddenly quits.

 

I was hoping for a buying opportunity in the low to mid $400s....

 

 

SJ

[Parsad]

8 minutes ago, StubbleJumper said:

 

 

I was hoping for a buying opportunity in the low to mid $400s....

 

 

SJ

 

That time has most likely come and gone.  We'll have to look for other bargains.  Cheers!

[Viking]

2 hours ago, StubbleJumper said:

My disappointment is that the stock has been more buoyant than I would like.  Mr Market really didn't hate the headline EPS number that they released two weeks ago.  Here we are halfway through August and all is quiet in the Atlantic basin, so the typical angst about hurricanes hasn't affected the market at all.  How is a guy supposed to get a bargain around here?!!  Maybe if Jen Allen would resign quietly with little explanation the stock would sell off as they always seem to do when the CFO suddenly quits.

 

I was hoping for a buying opportunity in the low to mid $400s....

 

 

SJ

US$500 was my buy zone. $450 was my back up the truck price. There is a chance we see Fairfax in the $450 range if stock markets re-test bear market lows and/or we get a couple of bad hurricanes the next 6 weeks. But i am starting to think i am getting too anchored to past prices that are simply too low (and not likely to be seen again - except under truly exceptional circumstances). Especially when US$511 (where it closed today) is wicked cheap. Why? Fairfax is executing very well. So the super cheap price of 2021 is likely no longer a realistic price (the super cheap price is now $50-$100 higher). 
 

So i was adding to my position late today. Fairfax is, once again, my largest holding (now larger than my collective oil holdings). The turnaround that has been happening at Fairfax for the past 4-5 years is largely done. The company is positioned better than it has ever been before - insurance and investments. And it is firing on all cylinders / executing exceptionally well. And the financial results have been very good the past 7 quarters and this solid performance should continue to run for years. The problem is many Fairfax investors have been burned so badly over the past decade they do not recognize or appreciate the company Fairfax has become in Aug 2022.
 

The big reason why i like Fairfax so much right now is its insurance businesses. And spiking interest and dividend income. And improving results at associates. Underwriting income + interest and dividend income + share of profits of associates = +$100/share ($25/share/quarter) on a go forward basis. Investment gains (lumpy - over time) should more than offset interest and corporate expenses and taxes. 

 

Fairfax also has many hidden assets which will get liquidated over time. First Capital. ICICI Lombard. Riverstone UK. Pet Insurance. Resolute Forest Products. Lots more remain hidden on Fairfax’s balance sheet. Waiting to be monetized in the coming years.

 

I think Fairfax book value will be around US$700/share by year end 2022 (up from $588/share today) and over US$800 by year end 2023. With shares trading today at $511 that puts price/BV at 2023YE at 0.65. Too cheap - even for Fairfax. At some point in time investors will connect the dots and Fairfax shares will pop another 30-40% in one year. So i am happy to get my position size right today… and then simply sit tight and wait.

—————

“It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine--that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.” 
― Edwin Lefèvre, Reminiscences of a Stock Operator

————-

“Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.” 
― Edwin Lefèvre, Reminiscences of a Stock Operator

Edited August 13, 2022 by Viking

[treasurehunt]

There is a lot to like about Fairfax, and it is now my second largest position after Berkshire, but has anyone thought much about how the company will do if we get a sustained period of high inflation? There are some obvious positives like higher interest and dividend income, but what if they need to add substantially to reserves for existing long-tail liabilities? I am not sure how to quantify this risk, even roughly. Any thoughts?

[Santayana]

Seems like that is an industry problem rather than a Fairfax specific problem, and would just lead to extending the hard market for a longer period of time.

[ander]

On 1/22/2022 at 8:22 PM, Viking said:

It is interesting to compare Fairfax’s current situation to what happened when we had the last big financial market dislocation in March of 2020. In March of 2020 Fairfax:

1.) insurance: losses from pandemic were unknown; lock downs were throttling business activity

2.) equities: many of Fairfax’s holdings were getting crushed (cyclicals, small cap, hospitality, financials, emerging markets).

3.) bonds: more of a mixed picture for Fairfax. Plunge in government yields would increase earnings and BV of holdings. Short spike in higher risk yields of higher risk bonds were an opportunity. Pain from much lower yields would only be felt in future.

 

Bottom line, Fairfax BV and earnings cratered. And the shares cratered.

 

Fast forward to today:

1.) insurance: hard market continues to roll. Economy expected to expand above trend in 2022. Prospects took very good.
2.) equities: we are seeing a bear market in speculative Nasdaq stocks. Fairfax’s top positions (Atlas, Eurobank, FFH TRS) are holding up well (so far)
3.) bonds: with yields across the curve spiking Fairfax should see interest income start to move higher again. There will be a hit to earnings and BV as current bond holdings are re-valued at quarter end (but Fairfax will be hit much less than most other insurance companies who have much more duration in their bond portfolio). If Fairfax is able to re-deploy some of its significant short term cash/holdings into longer dated bonds (yielding higher amounts) that will be a big, big win for shareholders (boosting interest income and locking in higher operating earnings in future years - something that would be highly valued by investment community).

 

Bottom line, Fairfax in a much better situation to withstand the current market turmoil. And that is likely why we are not seeing shares sell off aggressively. At least not yet  

 

 

$100 per year in income. What do you think downside risk is to that number on average?

[Viking]

44 minutes ago, ander said:

$100 per year in income. What do you think downside risk is to that number on average?

The biggest downside risks:

1.) underwriting: above average hurricane season (number and/or severity) or some other big catastrophe (they will happen). Or inflation remains much higher for longer than currently expected (resulting in insurance companies not charging enough).

2.) interest and dividend income: Fairfax is still extremely low average duration with its bond portfolio at 1.2 years at June 30. If short term interest rates crater that will, over time, bring interest income down.

3.) share of profits of associates: severe recession/bear market or Eurozone crisis (affecting Eurobank)

—————

There are also upside opportunities. Fairfax could hit $3 billion per year from the 3 buckets below. With a lower share count $140/share is not a crazy number looking 3 or 4 years out.

1.) underwriting: we could get a below average hurricane season this year. If future years CR could fall below 93 driving underwriting income over $1.4 billion. Hard market could stretch into 2024.
2.) interest and dividend income: Fairfax is able to extend duration and lock in higher interest rate driving interest and dividend income north of $1.2 billion per year

3.) share of profit of associates: could materially increase in coming years +15% over multiple years given growth prospects of companies.

Edited August 14, 2022 by Viking

[petec]

2 hours ago, Viking said:

The biggest downside risks:

1.) underwriting: above average hurricane season (number and/or severity) or some other big catastrophe (they will happen). Or inflation remains much higher for longer than currently expected (resulting in insurance companies not charging enough).

2.) interest and dividend income: Fairfax is still extremely low average duration with its bond portfolio at 1.2 years at June 30. If short term interest rates crater that will, over time, bring interest income down.

3.) share of profits of associates: severe recession/bear market or Eurozone crisis (affecting Eurobank)

—————

There are also upside opportunities. Fairfax could hit $3 billion per year from the 3 buckets below. With a lower share count $140/share is not a crazy number looking 3 or 4 years out.

1.) underwriting: we could get a below average hurricane season this year. If future years CR could fall below 93 driving underwriting income over $1.4 billion. Hard market could stretch into 2024.
2.) interest and dividend income: Fairfax is able to extend duration and lock in higher interest rate driving interest and dividend income north of $1.2 billion per year

3.) share of profit of associates: could materially increase in coming years +15% over multiple years given growth prospects of companies.

Viking, have you run a “normalised” scenario assuming long run underwriting at say 98% or 99%?

[Viking]

3 hours ago, petec said:

Viking, have you run a “normalised” scenario assuming long run underwriting at say 98% or 99%?

No i have not. Do you think this is likely? If you think it likely what is your normalized forecast for interest rates? My view is the two are tied together at the hip.
—————

Past normalized underwriting at 98 or 99% is one of the key drivers of the current 3 year hard market. Low interests rates (leading to low investment returns) is another. Not making enough money on underwriting AND investment returns and you have profit falling off a cliff. And with the US 10 year treasury trading around 2.8% low investment return are likely here to stay. So underwriting will have to be sub 95 to keep profitability just ok. 
 

Management teams at P&C insurance companies need to hit return targets to keep their jobs. Double digit ROE and double digit growth in BV/share. Investors need a decent return or insurance stocks will get punished. 
 

I like to listen to WRB’s conference calls. Lots of good discussion on the P&C insurance market and where things are going. Right now analysts feel insurance companies are being too conservative with their loss picks and padding reserves (meaning they should be reporting lower CR). If true this means we should see growing reserve releases in the future (leading to lower CR).
 

when i look at history underwriting tends to follow very long dated trend lines up and down (similar to housing). The trend for underwriting right now is lower. And i think it runs for a few more years. 
—————

10 years ago I think Fairfax had a 4 year stretch where underwriting averaged in the low 90’s. I wonder if they can get there again for a couple of years. 
—————

Inflation is probably the big unknown right now. Will it average 8% the next 5 years or 4%? Or lower? My guess is the uncertainty will keep the hard market going for another year or perhaps even 2. Until insurers get a better handle on the trend in inflation.

—————

What gives me some confidence with Fairfax and underwriting is Andy Bernard. I think he is pretty good. Fairfax stopped big insurance acquisitions about 5 years ago and they have spent the last decade digesting all the many insurance acquisitions made from 2012-2017. I am hoping this means we see Fairfax continue to post improving underwriting results.

—————

i also do not look too far into the future at these sorts of things (too many unknowns). I like the set up for the next 12 months. Beyond that i will remain open minded and keep learning…

[This2ShallPass]

I have been lurking here for a long time. Thanks to all the posters and the great discussion, this is an amazing community. A shout out to Viking who regularly shares his analysis, mid-qtr equity updates etc.

 

Fairfax is my largest holding (along with Fairfax India is ~30% of my pf). I have increased my position after the 2020 lows, but being a really long term holder Fairfax has definitely contributed to my underperformance (it's a position I was sitting tight on but maybe was not right).

 

Currently, I share the optimism as many in the board and they seem to be doing all the right moves. Here are couple of things to add to the potential upside

 

• Digit IPO - the last post in Digit talked about 15% at Rs.5000 crore, which translates to ~$4.2B valuation. Fairfax with their 74% share would be worth $3B (24% of today's market cap!). IPO might be the catalyst for the $3B to be baked into Fairfax by most analysts / investors. Question: it has taken a long time for Fairfax ownership to get from 49% to 74%, is this just a formality or do we still have some regulatory risk here?
• Buying back shares - if they were serious about following Teledyne, then we should see significant buyback over the next few years. If prices remain ~$500-550, it feels like another SIB is coming post the pet insurance sale?

-T2SP

 

[Parsad]

11 hours ago, This2ShallPass said:

 

• Digit IPO - the last post in Digit talked about 15% at Rs.5000 crore, which translates to ~$4.2B valuation. Fairfax with their 74% share would be worth $3B (24% of today's market cap!). IPO might be the catalyst for the $3B to be baked into Fairfax by most analysts / investors. Question: it has taken a long time for Fairfax ownership to get from 49% to 74%, is this just a formality or do we still have some regulatory risk here?
• Buying back shares - if they were serious about following Teledyne, then we should see significant buyback over the next few years. If prices remain ~$500-550, it feels like another SIB is coming post the pet insurance sale?

-T2SP

 

 

• As of Fairfax's latest update, they are still at 49% ownership of Digit, so naturally there is some political/economic risk that the increased ownership might not go through...more than a formality.  At the same time, when Fairfax said something is being approved or processed, it's rare that it doesn't happen...but the risk is still there it might not happen.  So don't count your chickens before the eggs have hatched!
• I think you will see continued buybacks if the stock is relatively cheap...0.9 times book value or less.  They've retired about 15% of the float between 2016 and 2022.  The TRS swaps they have will also have the effect of retiring another 2M shares...so perhaps a total of 22% of the float might be retired since 2016.  Stock buybacks have to be balanced with other opportunities, so I don't think you'll see anything like a Teledyne long-term buyback program, but they will be opportunistic and retire stock when it is cheap relative to other opportunities.  Cheers! 

[SafetyinNumbers]

 

Letter to Special Committee from ATCO shareholder, Charlie Frischer, asking for a bump to at least $16.50. It’s a good read for any Fairfax shareholders as well. Since Fairfax isn’t putting any new equity into the deal, a bump has no impact on Fairfax except to highlight ATCO’s value to FFH. 

 

 

https://www.newswire.com/news/lf-partners-charles-frischer-sends-letter-to-atlas-corporation-special-21796411

[Parsad]

7 hours ago, SafetyinNumbers said:

 

 

Letter to Special Committee from ATCO shareholder, Charlie Frischer, asking for a bump to at least $16.50. It’s a good read for any Fairfax shareholders as well. Since Fairfax isn’t putting any new equity into the deal, a bump has no impact on Fairfax except to highlight ATCO’s value to FFH. 

 

 

https://www.newswire.com/news/lf-partners-charles-frischer-sends-letter-to-atlas-corporation-special-21796411

 

Terrific letter!  Unfortunately, I doubt it will do anything other than to rally more shareholders to vote against the deal.  Cheers!

[Gregmal]

Not long ago there was a thread about Berkshire and some claimed it wasn’t cheap enough at 265 but FFH was definitely worth owning. Any updates thoughts?

[Parsad]

1 hour ago, Gregmal said:

Not long ago there was a thread about Berkshire and some claimed it wasn’t cheap enough at 265 but FFH was definitely worth owning. Any updates thoughts?

 

Weren't you the same guy who said Fairfax wasn't worth owning at $430 CDN?  What happened to that thread?  Any updates thoughts?

[Parsad]

Just now, Parsad said:

 

Weren't you the same guy who said Fairfax wasn't worth owning at $430 CDN?  What happened to that thread?  Any updates thoughts?

 

Also Greg, you were also part of the thread that was laughing at investors holding cash back in November...any updates, thoughts?

 

Just making my point that picking and choosing threads doesn't equate to an entire discussion...you know better than that!  Cheers!

[Viking]

2 hours ago, Gregmal said:

Not long ago there was a thread about Berkshire and some claimed it wasn’t cheap enough at 265 but FFH was definitely worth owning. Any updates thoughts?

i don’t think i was commenting on that thread (maybe i was?)… but the short time BRK traded at $265 i think Fairfax was trading around US$485 (June). So since then Fairfax is up about 6% and BRK is up about 14%. So if you had bought BRK at its absolute low of $265 in June instead of Fairfax you would have done better. 
 

Now a discussion I was part of was pounding the table to buy Fairfax in late Oct 2020. To be fair, lets not pick Fairfax’s low… lets go with a price of US$280. A buy and hold investor would have earned an 85% return to today. 
 

A BRK investor? From a cost of about $210 the return would have been about 44% to today. Good. A little more than 1/2 the return delivered by Fairfax. 
 

What an investor really wants to know (who is all cashed up) is which company is the better buy on Wed Aug 17? From current prices, and looking out a year or two my guess is Fairfax continues to outperform BRK and by a wide margin. Now is it more fun following Warren than Prem? Yes, most times it is. Fairfax is definitely a more hairy type of investment. 

Edited August 16, 2022 by Viking

[Gregmal]

6 hours ago, Parsad said:

 

Also Greg, you were also part of the thread that was laughing at investors holding cash back in November...any updates, thoughts?

 

Just making my point that picking and choosing threads doesn't equate to an entire discussion...you know better than that!  Cheers!

Yes, its still dumb. I would have been far worse off than I am now holding cash. 

[Gregmal]

6 hours ago, Parsad said:

 

Weren't you the same guy who said Fairfax wasn't worth owning at $430 CDN?  What happened to that thread?  Any updates thoughts?

Again, yes, and again. there was plenty of other stuff to buy that did just as well if not better, especially on IRR perspective. 

 

What Im looking at here is why FFH has so quickly again fallen out of favor. For a good while it was clearly working. Instead of going to cash you could have bought into the tender ever, and had ample opportunity to sell at high prices and at significant premium to what an index or cash would have provided. My post was trolling for sure, but the objective not really to agitate anything other than some qualitative assessment. Ive gotten really close to getting back in, but first want to see if I have a handle on the jigsaw puzzle that is Mr. Markets relationship with FFH. History has shown that when it works, it works, and when it doesnt...youre probably even better off being in cash. 

[Gregmal]

5 hours ago, Viking said:

What an investor really wants to know (who is all cashed up) is which company is the better buy on Wed Aug 17? From current prices, and looking out a year or two my guess is Fairfax continues to outperform BRK and by a wide margin. Now is it more fun following Warren than Prem? Yes, most times it is. Fairfax is definitely a more hairy type of investment. 

I agree fully with this. Im likely moving most of my BRK position into FFH soon.