Fairfax 2023

[Luke]

7 hours ago, Xerxes said:

 

He barely talks about his other holdings in his portfolio.

 

Recently found some nice paragraphs of him about paramount, he posted it on twitter, explained a bit also why berkshire could have a position. 

[Xerxes]

3 hours ago, Luca said:

Recently found some nice paragraphs of him about paramount, he posted it on twitter, explained a bit also why berkshire could have a position. 

 

The thing is he posted that after Berkshire bought it. 

Everybody is using Berkshire as some kind of intellectual filter.

 

[TwoCitiesCapital]

11 hours ago, Xerxes said:

 

He barely talks about his other holdings in his portfolio.

 

 

I've met Chris and know an employee or two at his firm. Have casually talked about Fairfax, and Fairfax India, with those employees and it's my understanding Fairfax would never be considered seriously for a portfolio holding because of the risk of a "blow up" is too high AND they don't view their core competency is foreign investments (specifically for Fairfax India). 

[Luke]

15 minutes ago, TwoCitiesCapital said:

 

I've met Chris and know an employee or two at his firm. Have casually talked about Fairfax, and Fairfax India, with those employees and it's my understanding Fairfax would never be considered seriously for a portfolio holding because of the risk of a "blow up" is too high AND they don't view their core competency is foreign investments (specifically for Fairfax India). 

Thanks for sharing!

[Xerxes]

43 minutes ago, TwoCitiesCapital said:

 

I've met Chris and know an employee or two at his firm. Have casually talked about Fairfax, and Fairfax India, with those employees and it's my understanding Fairfax would never be considered seriously for a portfolio holding because of the risk of a "blow up" is too high AND they don't view their core competency is foreign investments (specifically for Fairfax India). 

That is fair !  Thank you for sharing. 
 

That said, I question his position sizing on Newmont, for someone who worries about “blow up” risk with Fairfax. 
 

Newmont is trying to be biggest gold miner (getting bigger for getting big sake) to attract the “generalist investor” as the one-stop-shop for all of your gold investment. Contrast that with Barrick that refuses M&A at a premium and wants profitability on every mined ounce. 
 

Looks like Newmont has captured the generalist in Bloomstran. 

 

Edited February 24, 2023 by Xerxes

[MMM20]

Sorry, didn't mean to turn this into a Chris Bloomstran thread.

 

@Viking does an even better job in the weeds on FFH than Chris on BRK anyway.

 

Bottom line is that to the extent it's true that the blowup risk is higher in FFH than in many peers - which I might push back on - I think we are getting paid more than adequately to take that risk with the current setup.

 

A reasonable base case IV/share ~2 years out is ~30-40% higher than today's, driven by a high earnings yield and buybacks. And BTW the stock still trades at less than half of today's IV. IMHO.

 

Edited February 24, 2023 by MMM20

[glider3834]

On 2/24/2023 at 1:05 PM, glider3834 said:

just on cat risk exposure - yes higher than Markel but I think Fairfax have been taking pro-active steps here worth talking about

 

Cat losses were $1.3B In 2017 & that was 12.3% of net premium (adjusted to include a full year of premium from AWH) whereas in 2022, we had $1.3B in cat losses & it was 6.2% of net premium & they generated a $1.1B underwriting profit. 

 

To me that suggests while they have more than doubled their net premium earned, they are not growing their cat exposure. They also said they are keeping their cat exposure constant on a conference call, but its also good to see it reflected in the reported figures.

 

Also Brit recently reported they are reducing their cat risk exposure & Brit was responsible for 50% of the Ian loss that drove 50% of cat loss in 2022. This hopefully will have a flow on impact for 2023 & going forward so maybe potentially cat loss to net premium earned could fall further.

 

Also I wouldn't want FFH to completely do a u-turn on reinsurance business given the very hard market in 2023 & much more attractive reward on risk economics there now than in last 5 yrs. MKL looks like they have scaled back their property reinsurance business appetite too.

 

 

 

 

I forgot to add for context that global insured losses from natural catastrophe in 2017 were around $130B & Aon has recently estimated a similar figure for 2022 https://www.reinsurancene.ws/natural-disasters-caused-over-130bn-global-insured-losses-in-2022-aon/

 

so Fairfax exposure looks to have remained around the same level - around 1% of global insured loss in both years 

 

Edited February 25, 2023 by glider3834

[Viking]

It appears the non-insurance consolidated companies/equities now have a pre-tax earnings run-rate of about $400 million per year ($100 million per quarter). Moving forward this will be another nice sized and growing ‘bucket’ of earnings for Fairfax that is not reflected in prior year results. As earnings roll in for this bucket it will likely come as a ‘surprise’ for most investors.
 

Which Fairfax holdings are included in ‘non-insurance consolidated companies’ bucket?

1.) Fairfax India

2.) Recipe - Oct 2022, take-private, increased stake to 84%

3.) Thomas Cook India

4.) Dexterra

5.) Grivalia Hospitality - July 2022, increased stake to 78.4%

6.) AGT

7.) Boat Rocker

8.) Golf Town

9.) Farmers Edge - written down by $131 million in 2022

 

The take private of Recipe in Q4 of 2022, is a significant move for this bucket of earnings. Recipe will provide a much larger, relatively smooth source of earnings for Fairfax moving forward. We also got clarity on the Q4 conference call as to how the take private of Recipe was funded: Fairfax paid $243 million in cash, Recipe added $100 million in debt = $342 million purchase price. Fairfax was able to take Recipe private for only $240 million in cash at a price based off of trough earnings. Smart, opportunistic buggers.

—————

Why is looking at past results not helpful for this group of companies? The pandemic significantly affected many of the companies included in this bucket in 2020, 2021 and even the start of 2022 (especially Recipe, Thomas Cook India, Dexterra and BIAL). Also, in 2022, Fairfax wrote down its investment in Boat Rocker by $131 million. As we begin 2023, we should see the actual earnings power of the companies in this bucket shine through.
 

Kind of like we saw with the Share of Profit of Associates bucket in 2022 when earnings there spiked to over $1 billion and caught everyone by surprise. Moving forward, Share of Profit of Associates of $900 million + Non-insurance Consolidated of $400 million = $1.3 billion. Significant. 

—————

From Fairfax Q4 Conference Call:

 

“Secondly, on October 28, 2022, the company acquired all the multiple voting shares and subordinate voting shares in the capital of Recipe, other than the shares that were owned by the company and approximately 9.4 million multiple voting shares that were owned by Kara Holding Company at a cash purchase price of CAD20.73 per share or US$342 million in aggregate. That was comprised of cash consideration of $243 million and an increase in borrowings by Recipe of $100 million.

 

As a result of that transaction, the company recorded a loss in retained earnings of $66 million and a decrease in non-controlling interest of $276 million at December 31, 2022 and we had an equity ownership in Recipe of 84%, inclusive of the Recipe shares that are held in the ABLN that we entered into with RiverStone Barbados. Recipe was then subsequently delisted from the Toronto Stock Exchange.”

Edited February 26, 2023 by Viking

[Viking]

With Q4 results out I thought this would be a good time to update my 2022 actuals and 2023 estimates for Fairfax. I will do it in a couple of posts over the next couple of days. Much of the wording is copy/edit (from my previous posts) so if it looks familiar you have likely seen it before.

---------

At its core, Fairfax Financial is an insurance company. The size of Fairfax's insurance business has increased dramatically over the past 9 years (2014-2022). Net premiums written have increased from $6.1 billion in 2014 to $22.3 billion in 2022 for a compounded growth rate of 17.5% per year. That is a staggering increase. On a per share basis, Fairfax has grown net premiums written from $289/share to $957/share for a compounded growth rate of 16.1% per year. The share count is up 10% over this time period (2014 to 2022). The exceptional growth Fairfax has achieved over the past 8 years has occurred with a very modest increase in the share count. Fairfax is now one of the 25 largest P&C insurers in the world.

 

What has driven this significant growth? Two very different factors have been responsible:

1.) For the first 5 years (2014-2018) growth was driven mostly by acquisitions: Brit (2015), International (2016) and Allied World (2017).

2.) For the past 4 years (2019-2022) growth has been mostly organic and driven by the hard market.

Looking back, Fairfax timed their large insurance acquisitions perfectly - right before the hard market started.

 

The hard market in insurance looks like it is slowing as we begin 2023. Some segments, like property cat reinsurance, are just entering a hard market. As a result of Q4 results and commentary across the P&C industry, I am reducing my growth estimate for Fairfax to 8% for 2023 = net premiums written increase to $24.1 billion (from $22.3 billion in 2022). This would be a 300% increase in net premiums written over the past 9 years (2014-2023). Not too shabby. 

 

Why do we care what net premiums are? Because this is a key input in determining underwriting profit. And underwriting profit is a key input in determining what an insurance company will earn in a year. And earnings ultimately determine what a company is worth.

 

Fairfax finished with a CR of 94.7 for 2022. My estimate is Fairfax will finish with a CR of 94.5 in 2023. Why a slight improvement in CR? I expect the hard market of the past 4 years to provide a small tailwind. This would deliver an underwriting profit of $1.27 billion in 2023 ($55/share) which would be a new record for one year. The previous record was $1.1 billion in 2022 ($47/share).

 

Bottom line, the combination of solid growth in net premiums and solid underwriting should result in Fairfax earning another record underwriting profit in 2023.  

----------

Important: My numbers do NOT include runoff (to keep them consistent with how Fairfax reports them). I am estimating common stock effectively outstanding will fall to 23 million in 2023. 

 

Edited February 26, 2023 by Viking

[glider3834]

10 hours ago, Viking said:

It appears the non-insurance consolidated companies/equities now have a pre-tax earnings run-rate of about $400 million per year ($100 million per quarter). Moving forward this will be another nice sized and growing ‘bucket’ of earnings for Fairfax that is not reflected in prior year results. As earnings roll in for this bucket it will likely come as a ‘surprise’ for most investors.
 

Which Fairfax holdings are included in ‘non-insurance consolidated companies’ bucket?

1.) Fairfax India

2.) Recipe - Oct 2022, take-private, increased stake to 84%

3.) Thomas Cook India

4.) Dexterra

5.) Grivalia Hospitality - July 2022, increased stake to 78.4%

6.) AGT

7.) Boat Rocker

8.) Golf Town

9.) Farmers Edge - written down by $131 million in 2022

 

The take private of Recipe in Q4 of 2022, is a significant move for this bucket of earnings. Recipe will provide a much larger, relatively smooth source of earnings for Fairfax moving forward. We also got clarity on the Q4 conference call as to how the take private of Recipe was funded: Fairfax paid $243 million in cash, Recipe added $100 million in debt = $342 million purchase price. Fairfax was able to take Recipe private for only $240 million in cash at a price based off of trough earnings. Smart, opportunistic buggers.

—————

Why is looking at past results not helpful for this group of companies? The pandemic significantly affected many of the companies included in this bucket in 2020, 2021 and even the start of 2022 (especially Recipe, Thomas Cook India, Dexterra and BIAL). Also, in 2022, Fairfax wrote down its investment in Boat Rocker by $131 million. As we begin 2023, we should see the actual earnings power of the companies in this bucket shine through.
 

Kind of like we saw with the Share of Profit of Associates bucket in 2022 when earnings there spiked to over $1 billion and caught everyone by surprise. Moving forward, Share of Profit of Associates of $900 million + Non-insurance Consolidated of $400 million = $1.3 billion. Significant. 

—————

From Fairfax Q4 Conference Call:

 

“Secondly, on October 28, 2022, the company acquired all the multiple voting shares and subordinate voting shares in the capital of Recipe, other than the shares that were owned by the company and approximately 9.4 million multiple voting shares that were owned by Kara Holding Company at a cash purchase price of CAD20.73 per share or US$342 million in aggregate. That was comprised of cash consideration of $243 million and an increase in borrowings by Recipe of $100 million.

 

As a result of that transaction, the company recorded a loss in retained earnings of $66 million and a decrease in non-controlling interest of $276 million at December 31, 2022 and we had an equity ownership in Recipe of 84%, inclusive of the Recipe shares that are held in the ABLN that we entered into with RiverStone Barbados. Recipe was then subsequently delisted from the Toronto Stock Exchange.”

I was surprised viking when prem w on Q4 call said share profit from associates & non-insurance would conservatively be around $500M in 2023 - can we say he is possibly setting the bar low? In 2022, just Atlas & Eurobank provided $520M 

 

 

Edited February 26, 2023 by glider3834

[Viking]

8 hours ago, glider3834 said:

I was surprised viking when prem w on Q4 call said share profit from associates & non-insurance would conservatively be around $500M in 2023 - can we say he is possibly setting the bar low? In 2022, just Atlas & Eurobank provided $520M 

@glider3834 The short answer is i think Prem mis-spoke - or he is just being extremely conservative. Of course there are risks. We could get a severe global economic contraction. But to hit $500 million total in Share of Profit of Associates and Non-Insurance Consolidated Companies would require Altas, Eurobank, Fairfax India and Recipe all to blow up at pretty much the same time. Possible but unlikely. Especially given the glide path they are all on today.
 

My guess today is Fairfax in 2023 should earn:

1.) Share of Profits of Associates = $900 million. Less than 2022 because of lower contribution from Resolute. Exco Resources and Stelco will be volatile. But i would expect earnings from both Atlas and Eurobank to be higher in 2023 than 2022. GIG should also be up nicely in 2023 from 2022.
2.) Non-Insurance Consolidated Companies = $400 million. Contribution from Recipe should increase materially from 2022. Dexterra should also be up. Fairfax India should chug along. 
 

When i forecast i tend to lean heavily on the recent trend. And then i make adjustments for known one-time items and new news. I do this because so much is changing at Fairfax under the hood going back too far with historical numbers is pretty useless (garbage in, garbage out). Once i come up with my estimate i try and identify where i might be wrong. I tend to ignore what i think are low probability events (like guessing what business might get written down moving forward, exactly when an economic contraction will happen, when a management team at an equity holding is suddenly going to get stupid etc).
 

The big risks are big write-downs, like what happened with Farmers Edge in 2022. But i think most of the big write-downs have happened. Fairfax has done a very good job of ‘fixing’ most its problem children over the past 5 years: EXCO Resources (emerged from bankruptcy),  AGT (take private), Fairfax Africa (merged with Helios), APR (sold to Atlas), Farmers Edge (written down). Mosaic Capital was merged. Other historically problem holdings like Eurobank have clearly turned the corner and are solidly profitable. I do expect we will see more write-downs at Fairfax in the future. I just think they are hard to predict, will be smaller in size and should be easily absorbed by Fairfax.

—————

Fairfax Q4 Conference Call
 

“And the impact of this, you've recognized it now, but what's happened is for the longest time, we didn't reach for yield. And so, at the end of 2021, we had interest and dividend income of $500 million, $530 million to be exact. 50% of our portfolios were in cash and short term earnings 6 basis points, nothing. But we take a long-term view and in 2022, our interest and dividend income went up significantly, and they're running today at $1.5 billion, and we are slowly increasing duration to two, which means that '23, $1.5 billion, '24, $1.5 billion. That's probably more than we've ever had in the past, interest and dividend income of that amount.

 

Underwriting profit with our business, as you've seen, $1.1 billion last year, $1 billion, we think, is not -- it's conservative. And associates, which Jen highlighted very well. Associates and non-insurance income is -- on a conservative basis is $0.5 billion. So you add that up, $1.5 billion, $1 billion of underwriting profit, $0.5 billion, $3 billion of operating income, which was equates to about $100 a share for Fairfax shareholders. This would be the first time that we can make that comment that we've got $100 of earnings per share for the next couple of years.

 

And then on top of that, historically, we've made a lot of gains. And as you know, value investing is coming back nicely. So that's how we see our company, not on a quarter-by-quarter basis, but over time. We built our company over the long-term. It's quite transformational, going from $13.6 billion to $27.6 billion now. That's all in U.S. dollars. And with operating income, on a conservative basis of $100 a share. And that's -- on top of that, we expect to make gains as we have for 37 years, we just completed 37 years. So I just wanted to put that in perspective for you, Tom.”

Edited February 26, 2023 by Viking

[Viking]

After adjusting for what we learned from Q4 earnings release/conference call, my updated estimate for Fairfax earnings for 2023 is US$130/share. If this happens, BV will finish 2023 at about US$780 = ($660+$130-$10 dividend). Fairfax stock trades today at $680 < 0.9 x 2023YE est BV. 

 

This could be viewed as the optimistic take as I am not building in any big bad events: record year of catastrophe losses, global recession etc. Look forward to hearing others thoughts.

 

 

Assumptions/build:

1.) underwriting profit = $1.27 billion

- top line grows at 8-10% and CR = 94.5

- i am expecting average year for catastrophes and small tailwind from hard market; reserve releases similar to 2022.

2.) interest and dividends = $1.6 billion

- current run rate is $1.5 billion. Interest rates continue to move higher. Bond portfolio continues to increase in size.

3.) Share of profit of associates = $900 million

- less than last year reflecting sale of Resolute (once it closes). Exco and Stelco will be volatile. Earnings at Atlas, Eurobank and GIG should grow.

4.) Life Insurance and Run-off = similar to 2022

5.) Other (non-insurance consolidated companies) = $300

- Driven by Recipe/Fairfax India/TC India/Dexterra i think this could come in close to $400 million; but I chickened out and only put in $300 million.

6.) Interest expense = $505 million

- Q4 was $125 million

7.) Corporate overhead and other = similar to 2022

8.) Net gains on investments  = $800

- 5% of $16 billion equity portfolio. TRS on FFH are up $180 million YTD (yes, this will be volatile).

- Ambridge sale = $275 million gain before tax

9.) Income tax = guess (19%?)

10.) Non-controlling interests = wild guess (I have no idea)

 

One big wild card is share repurchases. It would not surprise me to see Fairfax take out 1 million or more shares in 2023. I am using 23 million as my number for weighted avg 'effective shares outstanding'. 

 

Impact of FFH adoption of IFRS17 when they report Q1 is not built into my estimate. 

----------

Notes:

- Underwriting profit: includes insurance and reinsurance; does not include runoff or Eurolife life insurance.

- Interest and dividends: includes insurance, reinsurance and runoff.

Edited February 26, 2023 by Viking

[glider3834]

On 2/27/2023 at 7:39 AM, Viking said:

After adjusting for what we learned from Q4 earnings release/conference call, my updated estimate for Fairfax earnings for 2023 is US$130/share. If this happens, BV will finish 2023 at about US$780 = ($660+$130-$10 dividend). Fairfax stock trades today at $680 < 0.9 x 2023YE est BV. 

 

This could be viewed as the optimistic take as I am not building in any big bad events: record year of catastrophe losses, global recession etc. Look forward to hearing others thoughts.

 

 

Assumptions/build:

1.) underwriting profit = $1.27 billion

- top line grows at 8-10% and CR = 94.5

- i am expecting average year for catastrophes and small tailwind from hard market; reserve releases similar to 2022.

2.) interest and dividends = $1.6 billion

- current run rate is $1.5 billion. Interest rates continue to move higher. Bond portfolio continues to increase in size.

3.) Share of profit of associates = $900 million

- less than last year reflecting sale of Resolute (once it closes). Exco and Stelco will be volatile. Earnings at Atlas, Eurobank and GIG should grow.

4.) Life Insurance and Run-off = similar to 2022

5.) Other (non-insurance consolidated companies) = $300

- Driven by Recipe/Fairfax India/TC India/Dexterra i think this could come in close to $400 million; but I chickened out and only put in $300 million.

6.) Interest expense = $505 million

- Q4 was $125 million

7.) Corporate overhead and other = similar to 2022

8.) Net gains on investments  = $800

- 5% of $16 billion equity portfolio. TRS on FFH are up $180 million YTD (yes, this will be volatile).

- Ambridge sale = $275 million gain before tax

9.) Income tax = guess (19%?)

10.) Non-controlling interests = wild guess (I have no idea)

 

One big wild card is share repurchases. It would not surprise me to see Fairfax take out 1 million or more shares in 2023. I am using 23 million as my number for weighted avg 'effective shares outstanding'. 

 

Impact of FFH adoption of IFRS17 when they report Q1 is not built into my estimate. 

----------

Notes:

- Underwriting profit: includes insurance and reinsurance; does not include runoff or Eurolife life insurance.

- Interest and dividends: includes insurance, reinsurance and runoff.

thanks for your work viking

 

non-insurance ops - I think the AR should provide some detail hopefully we can dig into the numbers a bit more - 

I wonder how the investment team think about correlated risk in their investment portfolio - for example low natural gas 12mth strip prices are a headwind for Exco but for Stelco they are a tailwind as natural gas is key input cost for steel, similarly higher interest rates are a headwind for Atlas (although Atlas has fixed 70% or so of its borrowings) but work as a tailwind for FFH's insurance ops.

 

interest & dividends - based on my calcs they are currently earning around 3.9% on their $38B fixed income portfolio - given US1,2,3y are all in mid to high 4s and mortgage bonds, corp bonds etc will be higher - I can see potential opportunity for them to raise bit more both yield & duration  - so you have estimated 1.6B & I agree think thats possible they can push yield beyond 1.5B - each 0.5% of additional yield would be equal to an extra $190M 

 

 

 

 

 

 

 

 

 

Edited February 27, 2023 by glider3834

[Viking]

On 2/25/2023 at 9:33 PM, Viking said:

With Q4 results out I thought this would be a good time to update my 2022 actuals and 2023 estimates for Fairfax. I will do it in a couple of posts over the next couple of days. Much of the wording is copy/edit (from my previous posts) so if it looks familiar you have likely seen it before.

---------

At its core, Fairfax Financial is an insurance company. The size of Fairfax's insurance business has increased dramatically over the past 9 years (2014-2022). Net premiums written have increased from $6.1 billion in 2014 to $22.3 billion in 2022 for a compounded growth rate of 17.5% per year. That is a staggering increase. On a per share basis, Fairfax has grown net premiums written from $289/share to $957/share for a compounded growth rate of 16.1% per year. The share count is up 10% over this time period (2014 to 2022). The exceptional growth Fairfax has achieved over the past 8 years has occurred with a very modest increase in the share count. Fairfax is now one of the 25 largest P&C insurers in the world.

 

What has driven this significant growth? Two very different factors have been responsible:

1.) For the first 5 years (2014-2018) growth was driven mostly by acquisitions: Brit (2015), International (2016) and Allied World (2017).

2.) For the past 4 years (2019-2022) growth has been mostly organic and driven by the hard market.

Looking back, Fairfax timed their large insurance acquisitions perfectly - right before the hard market started.

 

The hard market in insurance looks like it is slowing as we begin 2023. Some segments, like property cat reinsurance, are just entering a hard market. As a result of Q4 results and commentary across the P&C industry, I am reducing my growth estimate for Fairfax to 8% for 2023 = net premiums written increase to $24.1 billion (from $22.3 billion in 2022). This would be a 300% increase in net premiums written over the past 9 years (2014-2023). Not too shabby. 

 

Why do we care what net premiums are? Because this is a key input in determining underwriting profit. And underwriting profit is a key input in determining what an insurance company will earn in a year. And earnings ultimately determine what a company is worth.

 

Fairfax finished with a CR of 94.7 for 2022. My estimate is Fairfax will finish with a CR of 94.5 in 2023. Why a slight improvement in CR? I expect the hard market of the past 4 years to provide a small tailwind. This would deliver an underwriting profit of $1.27 billion in 2023 ($55/share) which would be a new record for one year. The previous record was $1.1 billion in 2022 ($47/share).

 

Bottom line, the combination of solid growth in net premiums and solid underwriting should result in Fairfax earning another record underwriting profit in 2023.  

----------

Important: My numbers do NOT include runoff (to keep them consistent with how Fairfax reports them). I am estimating common stock effectively outstanding will fall to 23 million in 2023. 

 

 

A couple of days ago I provided an update on how underwriting profit was tracking at Fairfax. Let’s now take a look at interest and dividend income. Of all of the many positive developments at Fairfax over the past 12 months, the increase in interest rates (and interest income) is one of the most exciting developments for shareholders.

—————

Summary: In 2022, Fairfax earned $962 million ($41/share) in interest and dividend income. This is a new annual record. In 2021 Fairfax earned $641 million ($27/share). For 2023, my estimate for interest and dividend income is $1.6 billion ($70/share), or +66% year-over-year. Put simply, that is a massive increase.

—————

Interest & dividend income = interest income + dividends - investment expenses.

—————

A.) Interest Income: In 2021, Fairfax earned $568 million in interest income = 1.5% yield on their $36.8 billion fixed income portfolio. In 2022, Fairfax is on track to earn $850 million in interest income = 2.2% yield on their $38 billion fixed income portfolio (we will know the exact amount when they publish the 2022 annual report in March). In 2023, my estimate is Fairfax will earn $1.6 billion in interest income = 3.9% yield on their $39 billion fixed income portfolio.

 

What has driven this significant increase in interest income?

1.) spiking interest rates: see table below of ‘US Treasury Rates’.

2.) extremely low duration of bond portfolio: 1.2 years at Dec 31, 2021 and 1.6 years at Dec 31, 2022.

3.) steadily growing size of fixed income portfolio: increased from $17.7 billion in 2014 to $38 billion in 2022.

 

Fairfax timed their move to short duration in the fixed income portfolio exceptionally well. With rates spiking higher, the low duration allows Fairfax to roll their large fixed income portfolio more quickly from very low yielding into much higher yielding securities (spiking interest income higher). Most P&C insurers have an average duration on their fixed income portfolio of closer to 4 years on average (so it will take them many years to fully realize the benefit of higher bond yields via higher interest income).

 

B.) Annual dividend income: Fairfax currently earns about $110-$120 million per year in dividends from its equity holdings. In 2022, Fairfax earned about $150 million in dividends driven by a special dividend in Q4 from Stelco of +$30 million.

 

C.) Annual investment expenses: Fairfax incurs investment expenses of about $36 million per year.

 

How has ‘interest and dividend income’ trended at Fairfax over 2022?

- Q2 report: run-rate had increased to $950 million per year.

- Q3 report: run rate had increased to $1.2 billion per year.

- Q4 report: run rate had increased to $1.5 billion per year.

Given bond yields have continued to move higher in Q1 2023, my guess is when Fairfax reports Q1 results in April we will learn the run rate has increase further to $1.6 billion or higher. 

 

What is the average duration of the bond portfolio at Fairfax? How is it changing?

- at Dec 31, 2021, the average duration of the bond portfolio was 1.2 years.

- at Dec 31, 2022 the average duration of the bond portfolio had increased to 1.6 years.

 

Fairfax communicated during the Q4 conference call that they would like to increase the average duration to 2 years during 2023. Extending the duration will allow Fairfax to lock in current high yields for years into the future. In February 2023, bond yields have been spiking again approaching the highs last reached in Oct and Nov 2022 (yields on 3 year Treasuries are at 4.49%). It appears Fairfax is currently being given a wonderful opportunity by the bond market to extend the duration of their bond portfolio.

 

 

 

[ValueMaven]

Everytime I look at FFH - I'd default to just wanting to increase my exposure in Markel and Berkshire....

[glider3834]

15 minutes ago, ValueMaven said:

Everytime I look at FFH - I'd default to just wanting to increase my exposure in Markel and Berkshire....

Why?

[Viking]

17 minutes ago, ValueMaven said:

Everytime I look at FFH - I'd default to just wanting to increase my exposure in Markel and Berkshire....

@ValueMaven are you able to provide a quick explanation as to why? To be super conservative, there is a pretty good chance Fairfax is able to earn US$120/share both in 2023 and 2024. Stock is trading at US$700. I think Fairfax is by far the cheapest of all three. I also think the near term set-up is best for Fairfax (in terms of earnings growth).

 

Is it:

1.) management?

2.) holding period? Want to buy and hold long term?

3.) the collection of assets? Others are higher quality?

Edited February 28, 2023 by Viking

[gfp]

13 minutes ago, ValueMaven said:

Everytime I look at FFH - I'd default to just wanting to increase my exposure in Markel and Berkshire....

 

That's interesting.  Berkshire is a completely different type of situation, but every time I look at Markel, which I own a tiny amount of, I end up purchasing more Fairfax (which I already own a consequential amount of).  The Berkshire I own is held in taxable accounts at such high deferred tax burdens that it will probably never be sold.  Owning a few companies with such large built up unrealized taxable gains that they won't be touched is the closest I will get to the 'dealraker ideal'...

[MMM20]

I’ve accepted the idea that FFH might attract only an extremely small niche within the already small niche of buffett / value nerds. Most will probably always prefer BRK or MKL, even at 2-3x the valuation…like 2 years ago… and even when things seem to be lining up especially well over the next couple years for FFH in particular and BVPS might be ~40-50% higher 2 years from now without heroic assumptions.

 

I’m OK with that if Prem can take out, like, half the share count at high incremental returns over the next decade.

 

Edited February 28, 2023 by MMM20

[Munger_Disciple]

1 hour ago, gfp said:

 

That's interesting.  Berkshire is a completely different type of situation, but every time I look at Markel, which I own a tiny amount of, I end up purchasing more Fairfax (which I already own a consequential amount of).  The Berkshire I own is held in taxable accounts at such high deferred tax burdens that it will probably never be sold.  Owning a few companies with such large built up unrealized taxable gains that they won't be touched is the closest I will get to the 'dealraker ideal'...

 

@gfp Interesting. A couple of questions: Do you hold Fairfax in a tax deferred account? And are you concerned about Fairfax's leverage (especially float relative to net worth) at all? Seems like their capital structure is very un-Berkshire like. 

Edited February 28, 2023 by Munger_Disciple

[gfp]

16 minutes ago, Munger_Disciple said:

 

@gfp Interesting. A couple of questions: Do you hold Fairfax in a tax deferred account? And are you concerned about Fairfax's leverage (especially float relative to net worth) at all? Seems like their capital structure is very un-Berkshire like. 

 

I hold Fairfax shares in both tax deferred and taxable accounts for myself and other people.  I'm not concerned with Fairfax's capital structure but it is true that it is nothing like Berkshire's.  Look around and you won't find very many companies like Berkshire.

 

If Fairfax moves to a more reasonable valuation I may reduce the size of my Fairfax holdings, probably starting with shares held in tax deferred accounts.  But who knows?  Maybe I will be more enthusiastic about Fairfax's prospects at that time.

 

I am not particularly excited about the returns from owning Berkshire going forward.  They will be decent and they will occur with a high likelihood as compared to other options.  The degree of certainty has value.  The interest free long term loan from the government has value.  Plus I like following the company and it is easy enough to value that occasionally you can play the options with uncommon safety (as far as buying call options is concerned).

 

Berkshire's great!  Fairfax is great!  Someone should make a website to discuss!

 

Edited February 28, 2023 by gfp

[Munger_Disciple]

3 minutes ago, gfp said:

 

I hold Fairfax shares in both tax deferred and taxable accounts for myself and other people.  I'm not concerned with Fairfax's capital structure but it is true that it is nothing like Berkshire's.  Look around and you won't find very many companies like Berkshire.

 

If Fairfax moves to a more reasonable valuation I may reduce the size of my Fairfax holdings, probably starting with shares held in tax deferred accounts.  But who knows?  Maybe I will be more enthusiastic about Fairfax's prospects at that time.

 

I am not particularly excited about the returns from owning Berkshire going forward.  They will be decent and they will occur with a high likelihood as compared to other options.  The degree of certainty has value.  The interest free long term loan from the government has value.  Plus I like following the company and it is easy enough to value that occasionally you can play the options with uncommon safety (as far as buying call options is concerned).

 

 

Thanks @gfp! I have looked at Fairfax for a while and never fully jumped in the pond (thought got my feet slightly wet a few times). The thing that worries me most (at a high level) is the amount of premiums (net) they write annually relative to net worth (and hence float relative to net worth). I owned Berkshire for a long time (20+ years) and I don't think Berkshire ever had that kind of leverage in insurance business even when they were tiny. But I suppose one could size the position accordingly. 

[Viking]

1 hour ago, MMM20 said:

I’ve accepted the idea that FFH might attract only an extremely small niche within the already small niche of buffett / value nerds. Most will probably always prefer BRK or MKL, even at 2-3x the valuation…like 2 years ago… and even when things seem to be lining up especially well over the next couple years for FFH in particular and BVPS might be ~40-50% higher 2 years from now without heroic assumptions.

 

I’m OK with that if Prem can take out, like, half the share count at high incremental returns over the next decade.

Having followed Fairfax for about 2 decades, narrative/sentiment is key with this stock (all stocks actually). Sentiment hit rock bottom in Q3 of 2020. The terrible performance from 2010-2016 (equity hedges), combined with the equity losses during the pandemic (which hit Fairfax especially hard because of their specific holdings) resulted in even the last of the long term holders unloading their shares. My guess is a bunch of these former investors will never own Fairfax again. How many ugly divorcees get back together again a few years later?

 

Fairfax is in the process of establishing a new narrative. 2021 was a record year. 2022 was a very good year. 2023 is shaping up to be another record year. Word is getting out… just look at what the share price has done over the past 5 months. Someone is buying shares and in volume. +50% in 5 months gets people’s attention. Trading at a 5.5 x PE (2023 earnings) is getting people’s attention. Trading at 0.9 x est 2023 year ending BV is getting people’s attention. Significantly outperforming in a bear market for the second year in a row will get people’s attention (I think people hate to lose money). And these are all conservative valuation metrics (actual results could easily be much better).
 

People are about to discover that Fairfax has:

1.) a massive, well run global insurance business (top 25 in the world).

- including a fast grower in India called Digit

2.) a $38 billion fixed income portfolio that is perfectly positioned for the current environment (low duration)

3.) a $16 billion equity portfolio that is diversified and well positioned (commodities, energy, India, private equity etc)

4.) run by a strong management team that is very good at capital allocation

- including US$10 dividend plus lots of share buybacks

 

Already looking forward to the Q1 earnings release. The true earnings power of the company will increasingly show up in actual results. With each passing quarter more and more investors will start to finally grasp the ‘new Fairfax’ story. The narrative will continue to get better. Sentiment will flip. Greed will kick in. It is the way of financial markets…

 

PS: the crazy thing for me is that the story just keeps getting better and better. What rabbits will Prem and co. pull out of the hat in 2023? Was the sale of Ambridge it for this year? Will Digit execute its IPO?

• Last year was the pet insurance sale (realized gain of almost $1 billion) and sale of Resolute for $625 million + $180 million ATV (at top of lumber cycle).
• In 2021 it was the $1 billion buyback (taking out 2 million shares at a pathetic US$500/share).
• Late 2020/early 2021 it was the TRS on FFH (1.96 million shares at US$372/share).

 

Nothing against Berkshire or Markel… but the past couple of years Fairfax has hit the ball out of the park repeatedly. And i don’t think they are done.

Edited March 1, 2023 by Viking

[Parsad]

2 hours ago, gfp said:

 

Berkshire's great!  Fairfax is great!  Someone should make a website to discuss!

 

 

I'll get right on it!    Cheers!

[Parsad]

1 hour ago, Viking said:

Having followed Fairfax for about 2 decades, narrative/sentiment is key with this stock (all stocks actually). Sentiment hit rock bottom in Q3 of 2020. The terrible performance from 2010-2016 (equity hedges), combined with the equity losses during the pandemic (which hit Fairfax especially hard because of their specific holdings) resulted in even the last of the long term holders unloading their shares. My guess is a bunch of these former investors will never own Fairfax again. How many ugly divorcees get back together again a few years later?

 

Fairfax is in the process of establishing a new narrative. 2021 was a record year. 2022 was a very good year. 2023 is shaping up to be another record year. Word is getting out… just look at what the share price has done over the past 5 months. Someone is buying shares and in volume. +50% in 5 months gets people’s attention. Trading at a 5.5 x PE (2023 earnings) is getting people’s attention. Trading at 0.9 x est 2023 year ending BV is getting people’s attention. Significantly outperforming in a bear market for the second year in a row will get people’s attention (I think people hate to lose money). And these are all conservative valuation metrics (actual results could easily be much better).
 

People are about to discover that Fairfax has:

1.) a massive, well run global insurance business (top 25 in the world).

- including a fast grower in India called Digit

2.) a $38 billion fixed income portfolio that is perfectly positioned for the current environment (low duration)

3.) a $16 billion equity portfolio that is diversified and well positioned (commodities, energy, India, private equity etc)

4.) run by a strong management team that is very good at capital allocation

- including US$10 dividend plus lots of share buybacks

 

Already looking forward to the Q1 earnings release. The true earnings power of the company will increasingly show up in actual results. With each passing quarter more and more investors will start to finally grasp the ‘new Fairfax’ story. The narrative will continue to get better. Sentiment will flip. Greed will kick in. It is the way of financial markets…

 

PS: the crazy thing for me is that the story just keeps getting better and better. What rabbits will Prem and co. pull out of the hat in 2023? Was the sale of Ambridge it for this year? Will Digit execute its IPO?

• Last year was the pet insurance sale (realized gain of almost $1 billion) and sale of Resolute for $625 million + $180 million ATV (at top of lumber cycle).
• In 2021 it was the $1 billion buyback (taking out 2 million shares at a pathetic US$500/share).
• Late 2020/early 2021 it was the TRS on FFH (1.96 million shares at US$372/share).

 

Nothing against Berkshire or Markel… but the past couple of years Fairfax has hit the ball out of the park repeatedly. And i don’t think they are done.

 

 

2 hours ago, MMM20 said:

I’ve accepted the idea that FFH might attract only an extremely small niche within the already small niche of buffett / value nerds. Most will probably always prefer BRK or MKL, even at 2-3x the valuation…like 2 years ago… and even when things seem to be lining up especially well over the next couple years for FFH in particular and BVPS might be ~40-50% higher 2 years from now without heroic assumptions.

 

I’m OK with that if Prem can take out, like, half the share count at high incremental returns over the next decade.

 

 

There's no reason investors can't hold all three.  I do.

 

Over the last 20 years, FFH has been at great prices several times with the last one being in 2020.  

 

MKL and BRK don't get as cheap as often (probably due to the stable cash flows from the third leg of operating businesses), but there have been at least a couple reasonable opportunities in those same 20 years.

 

If you bought at those opportune times and just held, you would have done quite well in a portfolio holding all three, with less volatility than just holding FFH and a cheaper overall portfolio based on valuation.  You also spread out the succession risk after the primaries retire or pass away.

 

Cheers!