Fairfax 2022

[StubbleJumper]

19 minutes ago, glider3834 said:

But can we make the argument that the baseline has moved up over the last 12 mths

 

peer group avg P/B multiple has expanded from 1.2 to 1.8x (adj to remove RLI & KNSL) (however, less expansion with ex AOCI multiple to 1.6x)

 

 

 

 

Valuations have expanded, but that doesn't mean that will be permanent or enduring.  Price to book has oscillated in a very wide range over the life of FFH.  There will be periods of gross over-valuation when it might trade at 1.4x and, as we've seen in the past couple of years, where are also periods when it trades at ridiculous multiples of 0.6x or 0.7x.  But, as a baseline assumption, I'd say 0.9x to 1.1x is a reasonably likely range for the end year price.

 

Don't get me wrong here!  I'd be happy to see 2023 earnings come in at $150/sh, and I'd be happy to see a 1.5x multiple, but I certainly don't count on either occurring.  But, overall, if the stock price came in at 1.0x the conservative book estimate of US$693, that would be a good return for 2023.

 

 

SJ

[Viking]

7 hours ago, StubbleJumper said:

 

 

Valuations have expanded, but that doesn't mean that will be permanent or enduring.  Price to book has oscillated in a very wide range over the life of FFH.  There will be periods of gross over-valuation when it might trade at 1.4x and, as we've seen in the past couple of years, where are also periods when it trades at ridiculous multiples of 0.6x or 0.7x.  But, as a baseline assumption, I'd say 0.9x to 1.1x is a reasonably likely range for the end year price.

 

Don't get me wrong here!  I'd be happy to see 2023 earnings come in at $150/sh, and I'd be happy to see a 1.5x multiple, but I certainly don't count on either occurring.  But, overall, if the stock price came in at 1.0x the conservative book estimate of US$693, that would be a good return for 2023.

 

SJ

I agree, using a 0.9-1.1 x BV multiple makes sense. Here some additional catalysts:
1.) buybacks and how aggressive Fairfax is moving forward. Fairfax could take out 150,000 shares a month =  US$90 million. If they did this for an extended period the stock would likely pop and likely trade north of the 1.1 x BV range.

2.) the investment community. Fairfax was a hated stock. As the investment community comes to understand the size, consistency and durability of future earnings, Fairfax could exit the penalty box and once again be viewed as an ok stock. This would push the multiple higher.

3.) real and growing earnings. In today's world near term cash type earnings are becoming more highly valued given their scarcity. Earnings at Fairfax will be primarily driven by underwriting profit and interest and dividend income, which is highly prized.

—————

With Fairfax today we have the perfect set up for a stock:

1.) cheap valuation

2.) much higher and growing earnings

3.) growing PE multiple

4.) meaningfully lower share count

We will see what actually happens in 2023.

Edited December 23, 2022 by Viking

[wondering]

Article in the Globe and Mail about Canadian P&C insurers in 2022, but does not mention FFH 

 

https://www.theglobeandmail.com/business/article-how-home-and-auto-insurers-trounced-the-big-six-banks-and-became/

 

Article summary

• Intact Financial (IFC) stock price grew 21% in 2022 to Dec 23
• Definity Financial stock price grew 30% in 2022 to Dec 23
• Banks down 15% on average
• TSX down 8%
• P&C usually pretty boring sector, not as dependent on the economy as other sectors
• mentions the hard market 
• A lot of the success of Intact and Definity due to personal auto insurance
• Intact CR 93%, Definity 96%
• Investment income helped by raising interest rates
• Intact recently bought RSA Insurance PLC
• Intact continues to increase its dividend to shareholders
• Definity, a newer player on the market.  
• article quotes National Bank analyst Jaeme Gloyn "Valuations aren't exactly rich".  Intact selling at 2.5X book (?????)

My comments

• as others on the discussion have pointed out, it depends on what the maturity make-up is of the insurer's bond portfolio.  FFH has played it exactly right (they are in the 1-2 year bonds).  If an insurer invested heavily in the 10 year bonds, they are getting killed. I quickly looked at Intact's last quarter new release, but I couldn't see what their bond portfolio looks like.
• The article mentioned that Intact has continued to raise its dividend.  Maybe this is a way for FFH to increase the multiple at which it sells at, however personally I like the modest dividend and I prefer the aggressive buyback of shares (more tax efficient).
• I don't quite understand the National Bank's analyst's quote of 2.5X book isn't expense for an insurer.  Boy, would I love to see FFH selling at 2.5X book

[cwericb]

7 hours ago, wondering said:

• The article mentioned that Intact has continued to raise its dividend.  Maybe this is a way for FFH to increase the multiple at which it sells at, however personally I like the modest dividend and I prefer the aggressive buyback of shares (more tax efficient).

 

I wonder what impact a 10 or 20 to one share split would have on the share price? After all, at $800C+ shares are getting pretty expensive for smaller investors. A $40 or even an $80 share price might be much more attractive to people with smaller portfolios.

 

Thoughts?

Edited December 28, 2022 by cwericb

[SafetyinNumbers]

56 minutes ago, cwericb said:

 

I wonder what impact a 10 or 20 to one share split would have on the share price? After all, at $800C+ shares are getting pretty expensive for smaller investors. A $40 or even an $80 share price might be much more attractive to people with smaller portfolios.

 

Thoughts?

Increasing dividends or a stock split would increase the share price almost certainly despite not having any impact on intrinsic value as both moves increase the pool of potential buyers.

 

I doubt either will happen.

[MMM20]

 

 

Amazing that FFH's NTM p/e is right around ~10 years lows given the performance of the past couple years. Maybe it's just confirmation bias as this imperfect metric squares with my view that the stock has gotten much cheaper relative to the growth in sustainable earnings power even as the stock price has nearly ~2.5x'd from pandemic lows. What a ballast for portfolios since the pandemic. It looks like they're set up better than ever to go from strength to strength... here's to a fairer low-teens multiple / $1,000+ stock in '23. Knock hard on wood.

 

Edited December 28, 2022 by MMM20

[Crip1]

5 hours ago, MMM20 said:

 

 

Amazing that FFH's NTM p/e is right around ~10 years lows given the performance of the past couple years. Maybe it's just confirmation bias as this imperfect metric squares with my view that the stock has gotten much cheaper relative to the growth in sustainable earnings power even as the stock price has nearly ~2.5x'd from pandemic lows. What a ballast for portfolios since the pandemic. It looks like they're set up better than ever to go from strength to strength... here's to a fairer low-teens multiple / $1,000+ stock in '23. Knock hard on wood.

 

Two separate thoughts:

 

Seeing a declining P/E in a hard insurance market is similar to when oil companies see the same when oil prices are rising. Insurance companies SHOULD see outsized growth in earnings when the market is the tide rising all boats.

This decline will bottom out and, eventually, move higher. The question is whether it will be due to increasing market value or decreasing earnings, or both.

 

Though others disagree with this, I still see the price/BV metric being the best way to value FFH. Buffet said years ago that intrinsic value of BRK roughly follows book value over time and it seems to fit with FFH as well. The good news is that intrinsic value has been growing in a few areas which are not reflected in Book Value, the pet insurance business and Digit being prime examples. The P/E graph suggests that FFH would be worth 2-3x what it is currently selling for assuming a reversion to a P/E of 20, and I don’t think that’s accurate. I do think that it’s worth a 25% premium to BV, which is about 20% higher than it is right now, more or less. Furthermore, as has been pointed out multiple times on this board, there are several catalysts for further improvement in BV so, yeah, I’m holding it.

 

-Crip

[Thrifty3000]

6 hours ago, MMM20 said:

 

 

Amazing that FFH's NTM p/e is right around ~10 years lows given the performance of the past couple years. Maybe it's just confirmation bias as this imperfect metric squares with my view that the stock has gotten much cheaper relative to the growth in sustainable earnings power even as the stock price has nearly ~2.5x'd from pandemic lows. What a ballast for portfolios since the pandemic. It looks like they're set up better than ever to go from strength to strength... here's to a fairer low-teens multiple / $1,000+ stock in '23. Knock hard on wood.

 

Or that they keep buying back bigly. As long as the business keeps improving I'll be sitting on my hands.

[Viking]

5 hours ago, Crip1 said:

Though others disagree with this, I still see the price/BV metric being the best way to value FFH. Buffet said years ago that intrinsic value of BRK roughly follows book value over time and it seems to fit with FFH as well. The good news is that intrinsic value has been growing in a few areas which are not reflected in Book Value, the pet insurance business and Digit being prime examples. The P/E graph suggests that FFH would be worth 2-3x what it is currently selling for assuming a reversion to a P/E of 20, and I don’t think that’s accurate. I do think that it’s worth a 25% premium to BV, which is about 20% higher than it is right now, more or less. Furthermore, as has been pointed out multiple times on this board, there are several catalysts for further improvement in BV so, yeah, I’m holding it.

 

-Crip

 

@Crip1 I agree that BV is generally a pretty good way to value insurance companies. But I think there has been so much happening at Fairfax over the past decade that today BV is not a very good way to value the future earnings power of Fairfax. I continue to think that Fairfax should be able to earn US$100/share (after tax and minority interest) in 2023 and 2024 = 6PE (with shares trading around US$600) and that is wicked cheap.

----------

Does anyone seriously think Fairfax has grown intrinsic value (as measured by BV) by a total of US$218/share = 58% over the past 13 years? Fairfax of 2009 is nothing like Fairfax of 2022.

 

                                            2009          Sept 30, 2022             Increase

Book value/share             US$370           US$588                   $218         +58%

 

Over the past 13 years (from 2009 to 2022) Fairfax has increased net premiums written by 414%. It has also increased investments by 140%. 

 

                                            2009                2022

Net premiums written       $4.3B               $22.1B (9 mo ann)   +414%

Investments                      $21.2B               $51B (Q3)                +140%

Net debt                             $1.1B                $7B (my est)            +540%

Share count                        20M                 23.4M                       +17%

 

Fairfax's earnings power has increased significantly from 2009 to 2022. Much more than the 58% increase in BV. Yes, the increase in debt has helped. As has the increase in share count. 

 

                                      underwriting    investments       total             shares outstanding

2009                                $215M              $1.3M        =     $1.515 billion / 20M = $76/share

2022 Est                          $1,105M            $3,060M   =   $4.165 billion / 23.4M = $178/share = +134%

 

Underwriting = 95%CR

Investments = 6% total return (interest & dividends + realized and unrealized gains)

 

[MMM20]

17 hours ago, Crip1 said:

Seeing a declining P/E in a hard insurance market is similar to when oil companies see the same when oil prices are rising. Insurance companies SHOULD see outsized growth in earnings when the market is the tide rising all boats.

Not to derail the convo here - i get your point but don’t think it’s quite the right comparison. We aren’t talking peak cyclical earnings in the same sense as a commodity producer, right? This won’t be like a US shale biz that makes 50% margins at $100 oil and then hands the keys to the bank at $40 oil.

We are talking about insurance prices up 20%+ for consecutive years before leveling off at some point, right? Would you expect their underwriting to flip to extremely unprofitable in a soft market?  Seems like the real earnings power should still be there. The investment portfolio is looking like a cash machine esp if they end up moving fixed income out in duration ahead of a flattish to down rate environment over the next few years.
 

I guess my point is the huge growth of float and the investment portfolio has created what looks like a big permanent boost in per share earnings power, so I think a higher multiple makes sense (even if insurance price increases over the next 5 years probably won’t look like the past couple) b/c Fairfax has many high incremental return uses for $100/share in sustainable annual earnings - they're not committed to investing back into the insurance business at lower incremental returns. I mean, how much could they buy back if they prioritized it for the next few years and the stock theoretically stayed at 6x earnings along the way? Like half the company at a 20%+ cost of (return on) equity? 

 

IMHO the low multiple is more about Fairfax still being in the penalty box for past indiscretions and the correction / redemption arc naturally happening in slow motion over years as these things go.
 

Maybe I’m wrong. Fairfax has luckily been a big position and winner for me for the past couple years, offsetting more than a few clunkers…but I’ve been recently inclined to add to it if anything. 
 

Edited December 29, 2022 by MMM20

[Crip1]

@MMM20The oil company comparison is not a perfect one, granted, but the concept of selling the product in the future for less than it is selling for now is similar between the industries. It is not a question of if the hard market in P&C Insurance is going to end, but when and how severely it will end. As the economics are presently, the industry is sure to attract new capital and any new entrants into the space have one big way to differentiate themselves and that’s with price. The market will soften, so profits are going to decline. And, in the past, the market softening has resulted in the industry as a whole eating capital which is going to drive down earnings (even taking into account the investment portfolio throwing off significantly more cash than we’ve ever seen at FFH) resulting in the P/E moving higher, even assuming the same share price. History does not repeat itself, but it rhymes.

 

@Viking Before responding, I do want to echo the sentiments of many others regarding the insights you’ve shown on this message board. You’ve done a great job making a complex analysis easier for many of us to understand and, for that, you have my sincerest appreciation. Your point about the BV now being notably different (higher quality) than the BV from 10-15 years ago is not in dispute and does, admittedly, show the limitations of using it as a valuation tool. P/E valuation has its limitations as well due to the lumpiness of FFH’s earnings and the inevitable Cat losses as well as the inevitable softening of the market. 

 

-Crip

[nwoodman]

Personally I think Fairfax have passed their biggest test and that was the bond portfolio. Not reaching for yield and flipping from an deflationary bias to an inflationary bias should set them up for peer outperformance for the foreseeable future.  If you take the view that that their bond prowess goes a long way to offsetting some of the investment clunkers then it is not hard to form a conservative view that they are worth of at least a 11% CAGR over the longer term.  Their regression to this mean of 35%CAGR from the COVID lows is still intact, more an observation than a prediction.  I won't be relying on $US1000 by YE 24 but it wouldn't surprise me either.  It's also be done to death, but the decision to become members of "shorters anonymous" should make returns more predictable.  However, I often wonder a little bit if their shorts may have been in the black overall but I would take what is a slightly more humble Fairfax compared to the company I sold out of completely in 2019.

 

[glider3834]

2 hours ago, Viking said:

 

@Crip1 I agree that BV is generally a pretty good way to value insurance companies. But I think there has been so much happening at Fairfax over the past decade that today BV is not a very good way to value the future earnings power of Fairfax. I continue to think that Fairfax should be able to earn US$100/share (after tax and minority interest) in 2023 and 2024 = 6PE (with shares trading around US$600) and that is wicked cheap.

----------

Does anyone seriously think Fairfax has grown intrinsic value (as measured by BV) by a total of US$218/share = 58% over the past 13 years? Fairfax of 2009 is nothing like Fairfax of 2022.

 

                                            2009          Sept 30, 2022             Increase

Book value/share             US$370           US$588                   $218         +58%

 

Over the past 13 years (from 2009 to 2022) Fairfax has increased net premiums written by 414%. It has also increased investments by 140%. 

 

                                            2009                2022

Net premiums written       $4.3B               $22.1B (9 mo ann)   +414%

Investments                      $21.2B               $51B (Q3)                +140%

Net debt                             $1.1B                $7B (my est)            +540%

Share count                        20M                 23.4M                       +17%

 

Fairfax's earnings power has increased significantly from 2009 to 2022. Much more than the 58% increase in BV. Yes, the increase in debt has helped. As has the increase in share count. 

 

                                      underwriting    investments       total             shares outstanding

2009                                $215M              $1.3M        =     $1.515 billion / 20M = $76/share

2022 Est                          $1,105M            $3,060M   =   $4.165 billion / 23.4M = $178/share = +134%

 

Underwriting = 95%CR

Investments = 6% total return (interest & dividends + realized and unrealized gains)

 

thanks viking

 

you have made this point but it is something I wanted to just comment on

 

I think that analysts place more emphasis on Operating income (underwriting profit & interest/dividend income & non-insurance income)  than they do on Investment gains (realised or unrealised) because operating income is seen as a more predictable.

 

So to the extent Operating income becomes a bigger component of Fairfax's earnings - we could say the earnings become more predictable/consistent or higher quality & so based on this factor (all else being equal) it would make sense to put higher P/B multiple or P/E multiple on those earnings (compared to earnings are coming principally from investment gains)

 

IMHO earnings power of the business has transitioned meaningfully - we have gone from a business that I thought could do 12% ROE (that gets me to P/B of 1.1 to 1.2) 12 mths ago,  to a business that could do ROE for 2023 closer to 15% with a significant Operating Income component in that Net income number , which IMHO takes the target P/B higher. (Aside: I am curious if we view Fairfax's fixed income management as significantly better than their peers who have lost 20-30% or more of their BV this year, should we ascribe some further premium to the P/B multiple - I believe we should) 

 

For 2023, I see the most significant opportunity in 2023 is reinsurance which could see record UWP assuming normalised cat activity & the biggest risk in 2023 I see is inflation impacting reserving - Fairfax's commercial, non-admitted business gives it flexibility to price ahead of inflation/cost trends but nevertheless remains a risk

 

Again above comments just my opinion, please always do your own due diligence ...

 

 

 

 

Edited December 29, 2022 by glider3834

[steph]

I have been a shareholder for 18 years and bought a lot more when Prem went ‘all in’.  On two metrics they have done a wonderful job: insurance side and the fixed income side.  Dan Bradstreet is just the best there is.  What he has achieved over the last 30 years must be the best track record in fixed income ever.

My target is 1000$ end of 2024.  So I am bullish.  BUT there is one last hurdle that will hurt sentiment on this one and that is Blackberry.  I don’t know the company but it seems to go to 0$ (when looking at financials).  In my head I subtract this from book value.  There are other positive surprises that will make up for this, but it will get a lot of buzz if and when this will happen.   

[MMM20]

@steph Blackberry is a tiny sliver of enterprise value at this point so wouldn't it be surprising if that makes much of a dent in fundamentals and/or sentiment with all the other positives nowadays?

[glider3834]

3 hours ago, MMM20 said:

@steph Blackberry is a tiny sliver of enterprise value at this point so wouldn't it be surprising if that makes much of a dent in fundamentals and/or sentiment with all the other positives nowadays?

+1

 

Blackberry i think we can pop in the bottom drawer - i do think Ivy is very interesting and worth following developments there - check out this Moodys podcast from 14min mark which explains how OEMs could threaten incumbent auto insurers or end up as distribution partners with their access to vehicle data and customers

 

https://www.moodys.com/web/en/us/about/insights/podcasts/moodys-talks-focus-on-finance.html

 

Another related article

 

https://www.carriermanagement.com/news/2022/03/10/233728.htm