Fairfax 2022

[LC]

My approach to Fairfax and Berkshire are slight different. Berkshire I generally only accumulate when it gets cheap, but I rarely sell. I should've sold at 360 but I'm OK not selling and holding that for a while, probably because I'm an idiot. Fairfax on the other hand I will trade in and out of.

[Gregmal]

1 hour ago, LC said:

My approach to Fairfax and Berkshire are slight different. Berkshire I generally only accumulate when it gets cheap, but I rarely sell. I should've sold at 360 but I'm OK not selling and holding that for a while, probably because I'm an idiot. Fairfax on the other hand I will trade in and out of.

Yup. You need a catalyst with FFH. We ve been hearing how cheap it is for years and it’s done nothing and even when Sanjeev tries to pump the tires by cherry-picking low points like $430 when you look at the context(do we need a list of stuff you could’ve bought in july 2020 when it was at 430) it’s just kind of been mediocre at best. However it does tend to follow a few patterns that seem predictable. Fundamentals have also gotten better, and while holding my breath, it seems they wanna keep buying back stock. So the ingredients are all basically on the kitchen table and at this point I think it’s just about seeing when they start working and what causes that.

[Viking]

5 hours ago, Gregmal said:

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. 

I really have no idea why Fairfax’s stock trades the way if does. Current sell off might be driven by:

1.) disappointment over Q2 results (significant fall in equity holdings)

2.) $750 million debt offering with no information as to how much Allied World will be bought back and at what price

3.) Recipe take private: another example of Fairfax doubling down in a big way on a terribly performing long term legacy holding?

4.) peak hurricane season?

—————

What will get the stock moving?

1.) pet insurance close: will result in a $950 million after tax gain = $40/share increase in BV.

2.) Allied World details: clarity on Allied World purchase of minority shareholders. Are they buying it all back? Or just part of it? How much? Pet insurance likely needs to close before they can announce anything. But given they just did the debt offering my guess is the pet insurance sale is close.

3.) Stelco dutch auction which closes Aug 31: Fairfax would receive C$455 million if they tender their shares. My math says they will need to come up with C$475 million to take Recipe private. If i was Fairfax i would make this trade in a heartbeat. Recipe should be able to deliver a pretty steady stream of C$125 million/year in free cash flow to Fairfax in perpetuity… i would sell a cyclical business cheap to buy what should be a predictable cash cow even cheaper. 
4.) another big Fairfax stock buyback: if Fairfax tenders its Stelco shares (to pay for Recipe) then i think that puts another big stock buyback of Fairfax shares back on the table for later this year. Fairfax is earning about $500 million a quarter in operating income. That is $1 billion in 2H. Of course, we need to get through hurricane season first.

- A reminder: Fairfax still has exposure to 1.96 million Fairfax shares via the TRS. Fairfax is HIGHLY motivated to get the share price higher. So i think it is highly likely we get another very large dutch auction type buyback in 2H. Or Fairfax starts to max out the NCIB. 

5.) Fairfax: when does Prem pull the next rabbit out of Fairfax’s hat? Fairfax is sitting on lots of valuable ‘hidden’ assets. More will be monetized and at surprisingly high prices. Like the recent pet insurance deal. We just don’t know when Fairfax will pull the trigger.
 

We are just entering the fun stage of owning Fairfax shares. It has been years and years in the making. 

—————

Digit IPO: Looking a little further out it is looking more and more like this will happen. My guess is perhaps 1H 2023 (but it could be 2H 2022). If Digit completes its IPO and at a valuation at or higher than where it is currently carried on books at Fairfax then i think this will be a big catalyst for Fairfax shares.

 

Edited August 16, 2022 by Viking

[Viking]

4 hours ago, LC said:

My approach to Fairfax and Berkshire are slight different. Berkshire I generally only accumulate when it gets cheap, but I rarely sell. I should've sold at 360 but I'm OK not selling and holding that for a while, probably because I'm an idiot. Fairfax on the other hand I will trade in and out of.

@LC you are exactly right. The best strategy for investors in Fairfax since 2014 has been to trade in and out of the stock. That is what i have been doing since 2019 and it has worked our very well.
 

However, i think the better strategy for investors moving forward is likely to be to buy and hold - at least a larger core position. Of course we will continue to get lots of volatility as it is Fairfax we are talking about. But investors who sell (expecting to buy back in at a lower price) might find the stock runs away from them and keeps on going higher.
 

I do expect the stock to break out of its 8 year trading range (a little above or a lot below US$500). And the breakout might be meaningful (i.e. to US$650 or even $700 by end of 2023. And then US$100/share higher every year for a few years after. Fairfax stock trading over US $1000 a share looking 4 years out is not a crazy number from my perspective.

 

Why? Underwriting income + int & div income + share of profit of associates + investment gains + monetizing more assets. I think investors are going to be surprised how much Fairfax earns in the coming years - and how much cash comes in. And how much lower Fairfax’s share count goes. A higher multiple from Mr Market and… bingo… US$1,000/share.

Edited August 16, 2022 by Viking

[Xerxes]

The reality is Prem is not sharing the canvas he has in mind. It all makes sense to him and his team, I am sure, but no narrative is being communicated to the shareholder base.  
 

At a certain price you get the deep value guys in, that is all fine and well. But at a certain point to bring the long term buy-and-hold you need to build and clearly communicate a narrative. 
 

even in the shareholder letters you are being dragged into the rabbit hole of some back story, which while fine and educational does not tell the would be buy-and-hold crowd where that canvas is going.    
 

Contrast that to Markel simplicity when it comes to communication to shareholders. For clarity we are not talking the merit of one capital allocator to another. But the effectiveness of their communication.
 

That being said, looks like Greg is jumping in with both feet !!! (Or soon)

[Thrifty3000]

15 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?

 

When it was $265 I was forecasting Fairfax earning $28 per share annually with earnings growth modestly outpacing inflation. That was based largely on their earnings of the prior 5 years and their share dilution trends. I invested a lot around $250 per share because I thought there was a decent chance Prem wouldn't repeat past sins, earnings would outpace expectations, and the share price could double within 5 years. Boy, were my earnings and share dilution projections off. I'm now more in the same camp as Viking as far as future expectations. So, I think FFH has hit its stride, and it will be a lot of fun to hold for the next few years. I also think $500 per share today represents about the same discount to my future expectations as $250 did when I first backed up the truck.

 

Edited August 16, 2022 by Thrifty3000

[Viking]

1 hour ago, Xerxes said:

The reality is Prem is not sharing the canvas he has in mind. It all makes sense to him and his team, I am sure, but no narrative is being communicated to the shareholder base.  
 

At a certain price you get the deep value guys in, that is all fine and well. But at a certain point to bring the long term buy-and-hold you need to build and clearly communicate a narrative. 
 

even in the shareholder letters you are being dragged into the rabbit hole of some back story, which while fine and educational does not tell the would be buy-and-hold crowd where that canvas is going.    
 

Contrast that to Markel simplicity when it comes to communication to shareholders. For clarity we are not talking the merit of one capital allocator to another. But the effectiveness of their communication.
 

That being said, looks like Greg is jumping in with both feet !!! (Or soon)

@Xerxes i am thinking along slightly different lines. I am not trying to be adversarial… i just like taking the other side of the argument. Because this is important stuff to debate.

 

i think Prem actually communicates too much. He says too much. So the important, core message gets lost. I find he has been getting better of late.

 

I think Fairfax’s basic business model is pretty straight forward and is understood by most sophisticated investors: underwriting profit + Interest and dividend income + (lumpy) investment gains. They are done building out their global insurance platform so future acquisitions will be tuck in’s (like the recent Singapore Re purchase). Future cash flows will be directed at:

1.) supporting subs in hard market (nearing the end of this use)
2.) buying out minority partners: Allied World, Brit and Odyssey Re.

- i.e. the Eurolife acquisition last year and the recent Allied World announcement

3.) share buybacks

- i.e. December 2021

 

Now Fairfax is not Berkshire or Markel. The types of businesses it invests in are often very different. And to state the obvious, even Berkshire’s stock often trades at large discounts over time. If investors don’t understand Buffett and Berkshire they certainly will not be able to understand Fairfax. Just look at the trouble most investors have when trying to explain their valuation of Berkshire… it often looks like a hot mess (so many different ways, none of which really get the job done in a neat and tidy fashion). What drives Berkshire stock is trust in Warren Buffett. And people trust Buffett because of his exceptional long term performance (yes, it has been slowing in recent years… but it is still good enough).

 

Fairfax’s core issue, in my humble opinion, is performance. It has sucked for the past decade. Why would Fairfax have any long term shareholders today? I do think Fairfax today is a very misunderstood animal. The core issue causing the dreadful performance has been fixed - they are no longer shorting so the last $500? million loss was taken in 2020 when they closed out the last short position. The second big issue causing underperformance (very poor equity selection) has also largely been fixed since 2018 or so. Covid then threw sand in the gears for a year or so (hitting insurance results primarily at Brit, dropping interest income through the floor - interest rates at zero - and hammering equity positions all at the same time). 
 

Today we have an insurance business growing +20% (and has been for years) with improving underwriting results (falling CR). Spiking bond yields are spiking interest income. And the equity holdings have, for the most part, bounced back strongly. Runoff and pet insurance businesses were sold bringing in +$2 billion. Lots of equity positions have been sold. The future for Fairfax has never looked better. This has all been communicated by Fairfax to shareholders. But investors are not drinking the Kool-Aid. Yet. 
 

As Fairfax delivers improving results i think investors will get interested again. Fairfax has been delivering for 7 quarters but clearly investors want to see further proof of improvement. And if Fairfax can string together 4 or 5 years in a row of solid results then i think long term shareholders will return. 

Edited August 16, 2022 by Viking

[SafetyinNumbers]

22 hours ago, Parsad said:

 

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

To be fair, there isn't any deal to vote on yet. The consortium made an opening proposal that might be too low for most shareholders. Let's see what the special committee bankers comes back with and if they are able to negotiate a price that they feel comfortable recommending to shareholders.

[Viking]

2 minutes ago, SafetyinNumbers said:

To be fair, there isn't any deal to vote on yet. The consortium made an opening proposal that might be too low for most shareholders. Let's see what the special committee bankers comes back with and if they are able to negotiate a price that they feel comfortable recommending to shareholders.

Why is ONE not buying all of Atlas? ONE already accounts for 24% of Seaspan’s business (its largest customer). ONE earned something like $6 billion in the last quarter so they can afford to buy whole company. 
 

Perhaps step 1 is get Atlas private. And step 2 in a year of two is to take out Fairfax at a nice premium (+$20/share). A Fairfax shareholder can dream…  

[SafetyinNumbers]

23 minutes ago, Viking said:

@Xerxes i am thinking along slightly different lines. I am not trying to be adversarial… i just like taking the other side of the argument. Because this is important stuff to debate.

 

i think Prem actually communicates too much. He says too much. So the important, core message gets lost. I find he has been getting better of late.

 

I think Fairfax’s basic business model is pretty straight forward and is understood by most sophisticated investors: underwriting profit + Interest and dividend income + (lumpy) investment gains. They are done building out their global insurance platform so future acquisitions will be tuck in’s (like the recent Singapore Re purchase). Future cash flows will be directed at:

1.) supporting subs in hard market (nearing the end of this use)
2.) buying out minority partners: Allied World, Brit and Odyssey Re.

- i.e. the Eurolife acquisition last year and the recent Allied World announcement

3.) share buybacks

- i.e. December 2021

 

Now Fairfax is not Berkshire or Markel. The types of businesses it invests in are often very different. And to state the obvious, even Berkshire’s stock often trades at large discounts over time. If investors don’t understand Buffett and Berkshire they certainly will not be able to understand Fairfax. Just look at the trouble most investors have when trying to explain their valuation of Berkshire… it often looks like a hot mess (so many different ways, none of which really get the job done in a neat and tidy fashion). What drives Berkshire stock is trust in Warren Buffett. And people trust Buffett because of his exceptional long term performance (yes, it has been slowing in recent years… but it is still good enough).

 

Fairfax’s core issue, in my humble opinion, is performance. It has sucked for the past decade. Why would Fairfax have any long term shareholders today? I do think Fairfax today is a very misunderstood animal. The core issue causing the dreadful performance has been fixed - they are no longer shorting so the last $500? million loss was taken in 2020 when they closed out the last short position. The second big issue causing underperformance (very poor equity selection) has also largely been fixed since 2018 or so. Covid then threw sand in the gears for a year or so (hitting insurance results primarily at Brit, dropping interest income through the floor - interest rates at zero - and hammering equity positions all at the same time). 
 

Today we have an insurance business growing +20% (and has been for years) with improving underwriting results (falling CR). Spiking bond yields are spiking interest income. And the equity holdings have, for the most part, bounced back strongly. Runoff and pet insurance businesses were sold bringing in +$2 billion. Lots of equity positions have been sold. The future for Fairfax has never looked better. This has all been communicated by Fairfax to shareholders. But investors are not drinking the Kool-Aid. Yet. 
 

As Fairfax delivers improving results i think investors will get interested again. Fairfax has been delivering for 7 quarters but clearly investors want to see further proof of improvement. And if Fairfax can string together 4 or 5 years in a row of solid results then i think long term shareholders will return. 

 

Great points as always, Viking.

 

A lot of investors bought in at high valuations and Prem used that paper to build/buy an extraordinary collection of float generating insurance businesses. He also didn't reach for yield which hurt ROE and operating earnings. I think those same investors are dumping their shares now as the stock tries to get back to all time highs. Maybe it takes buybacks for the shares to go up but as it's been highlighted before on this thread, the earnings power means there is a good chance, the company earns it share price in the next 5 years. Buybacks should help book value / share grow even faster.

 

 

[SafetyinNumbers]

6 minutes ago, Viking said:

Why is ONE not buying all of Atlas? ONE already accounts for 24% of Seaspan’s business (its largest customer). ONE earned something like $6 billion in the last quarter so they can afford to buy whole company. 
 

Perhaps step 1 is get Atlas private. And step 2 in a year of two is to take out Fairfax at a nice premium (+$20/share). A Fairfax shareholder can dream…  

 

I rather FFH owns ATCO forever and earn a 10-15% CAGR rather than having to find something else that does the same thing. I imagine, ATCO wouldn't be a favored counterparty for other shippers if ONE owned all of it. 

[Viking]

29 minutes ago, SafetyinNumbers said:

 

I rather FFH owns ATCO forever and earn a 10-15% CAGR rather than having to find something else that does the same thing. I imagine, ATCO wouldn't be a favored counterparty for other shippers if ONE owned all of it. 

For other shippers, especially those from the other alliances (the alliances ONE is not part of), i just wonder how ONE owning 30 or 35% of Altas is all that different from ONE owning 100%? My guess is this deal makes the other shippers nervous and likely to want to do business elsewhere - which is not good for Seaspan and their future growth prospects. It appears a recent sale of a vessel did not go through for Seaspan… perhaps another shipper got wind of this deal and walked away? I am speculating (big time) but i have seen no discussion/analysis of ONE and this deal and that is surprising to me as ONE is the elephant in the room. 
 

Regarding Fairfax, i am impatient and i like to keep things simple. An Atlas sale at +$20 would likely allow Fairfax to greatly simplify their structure and build a more fortress like balance sheet:

1.) buy out any remaining minority shareholders - eliminate those dividend payments

2.) right size total debt - if needed

[Parsad]

10 hours ago, Gregmal said:

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. 

 

I don't consider FFH as cheap as Viking does presently.  When I first started loading up, it was at 0.6 times book...and I kept buying till about 0.75 times book.  I have not added since.  But it made up about 60% of the portfolio at that point...now at about 30%.

 

Assuming FFH has risen back up to its Q1 book value of $630 USD after being down in Q2, that would give it a price to book of 0.85-0.87 or so.  It's undervalued, but not dirt cheap.  I personally like a larger margin of safety.

 

Now is it cheaper than many other stocks in the market?  Maybe not significantly cheaper, but the upside looks as good if not better.

 

Cheers! 

[Parsad]

6 hours ago, Gregmal said:

Yup. You need a catalyst with FFH. We ve been hearing how cheap it is for years and it’s done nothing and even when Sanjeev tries to pump the tires by cherry-picking low points like $430 when you look at the context(do we need a list of stuff you could’ve bought in july 2020 when it was at 430) it’s just kind of been mediocre at best. However it does tend to follow a few patterns that seem predictable. Fundamentals have also gotten better, and while holding my breath, it seems they wanna keep buying back stock. So the ingredients are all basically on the kitchen table and at this point I think it’s just about seeing when they start working and what causes that.

 

You're the one who was cherry-picking with Berkshire's price at $265 and then comparing it to FFH's performance.  Hypocrite!  Cheers!

[Viking]

1 hour ago, Parsad said:

 

I don't consider FFH as cheap as Viking does presently.  When I first started loading up, it was at 0.6 times book...and I kept buying till about 0.75 times book.  I have not added since.  But it made up about 60% of the portfolio at that point...now at about 30%.

 

Assuming FFH has risen back up to its Q1 book value of $630 USD after being down in Q2, that would give it a price to book of 0.85-0.87 or so.  It's undervalued, but not dirt cheap.  I personally like a larger margin of safety.

 

Now is it cheaper than many other stocks in the market?  Maybe not significantly cheaper, but the upside looks as good if not better.

 

Cheers! 

@Parsad  I am bullish on Fairfax today primarily because i see its near term earnings power increasing quite a bit. 

 

I think price to BV is a useful rough guide to use to value an insurance stock - it is one measure. But even Buffett says price to BV is not a great way to value BRK today given its evolution and many assets worth far more than what is captured in BV (and future earnings power of the various businesses). I think Fairfax is now of a size and age that using BV is getting less useful. 
 

Most importantly, BV can under-value legacy assets that are growing nicely over many years. Fairfax has a bunch of these. BV is also a rear view mirror measure - it reflects past results. Looking primarily at BV (to value a company) in ‘turnaround’ situations (which is how i view Fairfax today), where earnings are set to increase like a coiled spring, i think way undervalues the company. .
 

1.) The pet insurance sale for $1.4 billion, and a $950 million after tax gain. Where was that asset captured in BV pre sale announcement? It wasn’t. Historical cost was. And the earnings over the years. But BV messed up big time reflecting intrinsic value of the pet insurance business. Of course post sale things get trued up and BV now does reflect the value of the pet insurance business. Poof, like magic, BV will be $40 higher.

2.) Fairfax is growing its net written premiums by 20% and growth has been strong for 3 years. At the same time underwriting has been improving (CR has been coming down). That means Fairfax is now delivering record underwriting income. 2023 should be even better. Where is that reflected in BV? An investor should give Fairfax a higher price to BV multiple (if future earnings are expected to be higher). 
3.) future interest income. Will also be in record territory shortly. 
4.) future share of profit of associates: will be in record territory shortly (if it is not there already)

Some have commented that they think Fairfax might be cheaper today than when it was trading at US$260 in Oct 2020. From a BV perspective that is clearly not true. However, when you do the valuation in terms of future earnings power of the various businesses (growth in Digit and possible IPO etc) i think the valuation today is likely pretty close to that of Oct 2020. Very cheap and possibly crazy cheap, i would say  

Edited August 17, 2022 by Viking

[treasurehunt]

3 hours ago, Viking said:

Why is ONE not buying all of Atlas? ONE already accounts for 24% of Seaspan’s business (its largest customer). ONE earned something like $6 billion in the last quarter so they can afford to buy whole company. 
 

Maybe this has already been discussed, but I have been wondering how it makes sense for ONE to buy part of ATCO, let alone the whole company. Isn't most of Seaspan's business with direct competitors of ONE? In most industries, any company would be leery of doing business with a supplier owned by a direct competitor. Is this somehow different in shipping? Also, ATCO's plan was to transform into a general infrastructure platform. ONE seems to be strictly a container shipping company. But it could be that ONE has a grander vision for itself.

[Parsad]

1 hour ago, Viking said:

@Parsad  I am bullish on Fairfax today primarily because i see its near term earnings power increasing quite a bit. 

 

I think price to BV is a useful rough guide to use to value an insurance stock - it is one measure. But even Buffett says price to BV is not a great way to value BRK today given its evolution and many assets worth far more than what is captured in BV (and future earnings power of the various businesses). I think Fairfax is now of a size and age that using BV is getting less useful. 
 

Most importantly, BV can under-value legacy assets that are growing nicely over many years. Fairfax has a bunch of these. BV is also a rear view mirror measure - it reflects past results. Looking primarily at BV (to value a company) in ‘turnaround’ situations (which is how i view Fairfax today), where earnings are set to increase like a coiled spring, i think way undervalues the company. .
 

1.) The pet insurance sale for $1.4 billion, and a $950 million after tax gain. Where was that asset captured in BV pre sale announcement? It wasn’t. Historical cost was. And the earnings over the years. But BV messed up big time reflecting intrinsic value of the pet insurance business. Of course post sale things get trued up and BV now does reflect the value of the pet insurance business. Poof, like magic, BV will be $40 higher.

2.) Fairfax is growing its net written premiums by 20% and growth has been strong for 3 years. At the same time underwriting has been improving (CR has been coming down). That means Fairfax is now delivering record underwriting income. 2023 should be even better. Where is that reflected in BV? An investor should give Fairfax a higher price to BV multiple (if future earnings are expected to be higher). 
3.) future interest income. Will also be in record territory shortly. 
4.) future share of profit of associates: will be in record territory shortly (if it is not there already)

Some have commented that they think Fairfax might be cheaper today than when it was trading at US$260 in Oct 2020. From a BV perspective that is clearly not true. However, when you do the valuation in terms of future earnings power of the various businesses (growth in Digit and possible IPO etc) i think the valuation today is likely pretty close to that of Oct 2020. Very cheap and possibly crazy cheap, i would say  

 

Hi Viking, anything can happen with legacy assets...anything can happen with insurance.  Buffett may say that Berkshire is worth more than it's book value...but Berkshire has quality cash flowing companies that make money in the worst of circumstances.  Would you put Recipe up against See's?  Blackberry against Apple?  What business at Fairfax has a similar moat or steady cash flows like Burlington Northern?  FFH and BRK are still two very different animals at this stage.

 

Even Berkshire is not immune to the laws of gravity in economics (valuation).  One massive quake in Los Angeles and Berkshire's stock price will definitely drop below book.  While that metric may be adjusted based on the quality of the cash flows being generated, it is still arguably the best simple valuation tool for finance/insurance businesses.

 

I agree with you that FFH is cheap.  Is it cheaper than other investments in the market?  It is probably still one of the cheaper stocks in the finance/insurance sector...but there are other cheap companies out there as well.  But FFH is definitely not as cheap as it was back in 2020.  More things are lining up to allow it to grow and maintain momentum going forward than earlier, but on a valuation basis, it is not cheaper than back in 2020.  Cheers!   

[Gregmal]

There is a difference between cheap and cheap with a catalyst. This is where I think @Viking is right. I am a bit biased because I’ve watched Prem for a while and he’s a bit of an egomaniac who’s incentives haven’t always been aligned. However if you start with 2019 or so, and only look at those actions, and ignore the poor timing of removing short bets, he has otherwise been delivering exactly as you’d want. The actions have been stellar. He monetized some stuff. He’s bought back stock. He seems to have a renewed focus. So if that continues and they keep reducing the denominator, you need very little to go right at these prices. This is also at a level where 10-20% lower stock prices allow you to back into a much more aggressive position. So the setup is good and I also think it’s reasonable hedged against inflation and rates. So I guess we ll see but the old man seems to be invested in his stock price again which is always a positive. 

[Gregmal]

It’s similar just not as good as the setup with Berkshire a couple years ago when Buffett finally stopped worrying about bagging elephants and instead started buying back stock.

[petec]

11 hours ago, Viking said:

Recipe should be able to deliver a pretty steady stream of C$125 million/year in free cash flow to Fairfax in perpetuity… i would sell a cyclical business cheap to buy what should be a predictable cash cow even cheaper. 

Once* the SIB is done FFH will own C$145m/year worth of normalised FCF at Stelco, plus a one-third share of any excess cash flow it generates before (if) steel markets return to historic norms. They won’t control this cash flow (yet!), and it will be lumpy, but Prem shows every sign of valuing the lumpy dollar as highly as the smooth one. I could be dead wrong but I don’t see him selling into the SIB. 

*I should have said if, but if the SIB doesn’t complete Stelco has a massive cash pile so the value remains. 

[petec]

On 8/14/2022 at 9:36 AM, Viking said:

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…

I’m not sure whether it’s likely but I think it’s prudent to stress test for it. 
 

Rates have been low for nearly 15 years now without causing a hard market. That’s at least partly because managers, shareholders, and external capital accepted a lower than double digit roe (precisely because rates were low). It’s also partly because falling rates drove a bond bull market and BV gains. I think it’s the change in direction in rates, as much as the level of rates, that’s driven the insurance market hardening.
 

If rates continue to rise that driver remains in place, but I think it would be conservative to assume they level off at a historically low level (say 3 or 3.5%) and then look at what level of CR is needed for an industry ROE of say 8%. Note: these numbers are not predictions just suggestions for a bear case normalized CR modelling exercise. 

[Parsad]

3 hours ago, Gregmal said:

There is a difference between cheap and cheap with a catalyst. This is where I think @Viking is right. I am a bit biased because I’ve watched Prem for a while and he’s a bit of an egomaniac who’s incentives haven’t always been aligned. However if you start with 2019 or so, and only look at those actions, and ignore the poor timing of removing short bets, he has otherwise been delivering exactly as you’d want. The actions have been stellar. He monetized some stuff. He’s bought back stock. He seems to have a renewed focus. So if that continues and they keep reducing the denominator, you need very little to go right at these prices. This is also at a level where 10-20% lower stock prices allow you to back into a much more aggressive position. So the setup is good and I also think it’s reasonable hedged against inflation and rates. So I guess we ll see but the old man seems to be invested in his stock price again which is always a positive. 

 

I don't look for catalysts.  I just look for undervalued...especially deeply undervalued.  I've never bought any stock looking for a catalyst other than ORH...and that was because many of us thought that Fairfax was going to make a play for it.  Other than that...I buy cheap, doesn't matter about management, catalysts, strategy, whatever.  If its mispriced, the market will eventually ALWAYS recognize that disparity...as dependable as gravity.  Cheers!

[petec]

11 hours ago, Viking said:

I really have no idea why Fairfax’s stock trades the way if does. Current sell off might be driven by:

1.) disappointment over Q2 results (significant fall in equity holdings)

2.) $750 million debt offering with no information as to how much Allied World will be bought back and at what price

3.) Recipe take private: another example of Fairfax doubling down in a big way on a terribly performing long term legacy holding?

4.) peak hurricane season?

Might it not be as simple as the market is starting to position for a recession and a slower pace of rate increases, while insurance is somewhat procyclical and Fairfax in particular is a beneficiary of rising rates?

[This2ShallPass]

On 8/16/2022 at 11:35 AM, Viking said:

Fairfax stock trading over US $1000 a share looking 4 years out is not a crazy number from my perspective.

I would be disappointed with this, for the 5-yr period from 2022 it would just be a double. Fairfax seems to be in a position with almost everything going right and all the positives that has been discussed in the board.

 

With all of this, 15% 5-yr cagr feels too low. Just curious on what should be the expectation for % BV growth over the next 4 years? If Fairfax consistently delivers BV/share improvement for the next 4 years, then it's reasonable to expect a much higher multiple  (1.2-1.3x BV?)..

[Viking]

24 minutes ago, This2ShallPass said:

I would be disappointed with this, for the 5-yr period from 2022 it would just be a double. Fairfax seems to be in a position with almost everything going right and all the positives that has been discussed in the board.

 

With all of this, 15% 5-yr cagr feels too low. Just curious on what should be the expectation for % BV growth over the next 4 years? If Fairfax consistently delivers BV/share improvement for the next 4 years, then it's reasonable to expect a much higher multiple  (1.2-1.3x BV?)..

@This2ShallPass great question. My focus with Fairfax is earnings. Trying to predict multiple is even more difficult. My thesis is Fairfax is going to deliver VERY good earnings the next couple of years. It makes sense that Mr Market would also reward the stock with a higher multiple as Fairfax delivers. 
—————

So i think it is likely that Fairfax stock delivers a trifecta for investors in the next couple of years:

1.) rapidly growing earnings and BV

2.) Mr Market rewarding the stock with a higher multiple

3.) much lower share count (via stock buybacks)

If this happens then Fairfax at US$1,000 in 4 years is likely too low. 
 

I also do not get too anchored in what might happen in 3 or 4 years. That is too far away to really know much. My focus is this year (2022) and next year (2023) and getting that right. 

Edited August 18, 2022 by Viking