Fairfax 2023

[Viking]

After the US and Canada, India is Fairfax’s most important geography. In a world starved for growth, India is expected to be one of the fastest growing economies over the next decade. Morgan Stanley is projecting an economic boom in India (see below). Fairfax has repeatedly said they believe India is best country to invest in today. So, we should expect India to increase in importance for Fairfax investors in the coming years.

 

I thought it would be interesting to do a bit of a deep dive on India and Fairfax. Over the next few days I am planning to post on a number of topics:

 

1.) India: the big picture

 

I will then zoom into Fairfax and India

2.) Summary of current investments in India

3.) History: Insurance investments

4.) History: Non-insurance investments

5.) People

6.) Summary

 

-----------

1.) India: the big picture

 

India is exceptionally well positioned today:

• demographic tailwind: India has the largest population in the world, and it is very young with a median age of 28.2 years (China’s is 39). This should drive higher domestic consumption.
• regulatory tailwind: India has a pro-business government - ease of doing business in India is improving greatly. This should drive investment spending.
• geopolitical tailwind: companies are aggressively looking to diversify supply chains away from China - Apple’s plans to shift 25% of iPhone production to India being just one example

Many important building blocks are in place. This should result in very strong economic growth for India over the next decade. India looks positioned to finally realize its vast potential - it is no longer just a dream.

 

------------

Morgan Stanley: “India’s Impending Economic Boom: India is on track to become the world’s third largest economy by 2027, surpassing Japan and Germany, and have the third largest stock market by 2030, thanks to global trends and key investments the country has made in technology and energy.”

• https://www.morganstanley.com/ideas/investment-opportunities-in-india

The Future of India (this video was mentioned by Prem in his letter in the 2022AR)

 

Deepak Bagla, Managing Director & CEO, Invest India

• https://www.youtube.com/watch?v=45PrXujlQCo

----------

 

2.) Summary of Fairfax’s current investments in India

 

Fairfax's business model has much more of an international focus than most of its P&C insurance peers. This is true for both insurance and non-insurance investments. India is Fairfax's most important international market.

 

Fairfax does a good job of summarizing for shareholders all of their investments in India each year in the annual report. Below is the summary provided in the 2022AR. Key take-aways:

• Insurance investments (Digit) fair value = $2.3 billion
• Non-insurance investments fair value = $1.5 billion

Fairfax has a total of about $15 billion in equity investments. At Dec 31, 2022, non-insurance investments in India of $1.5 billion represented about 10% of Fairfax’s total.

 

 

----------

3.) A short history of Fairfax’s insurance investments in India

 

Fairfax began its insurance journey in India in 2000. That was the year the government in India opened up the property and casualty insurance industry to foreign investment. Fairfax partnered with ICICI Bank, a large private bank in India, and created a joint venture called ICICI-Lombard. Fairfax invested $10 million for an interest of 26% in the new venture, the maximum allowed by Indian law at the time.

 

ICICI-Lombard experienced rapid growth in the years that followed and by 2006, they had become the largest private general insurance company in India with a 12.5% market share. Over the years Fairfax made numerous capital infusions to support the growth of ICICI-Lombard and maintain their ownership at 26%.

 

In 2015, the Indian government allowed foreign ownership in insurance companies to increase to 49%. That year Fairfax purchased an additional stake of 9% in ICICI-Lombard from ICICI Bank for $234 million; this increased Fairfax’s ownership in ICICI-Lombard to 35%.

 

In 2017, ICICI Bank decided it was time to take ICICI-Lombard public. ICICI Bank wanted to maintain ownership of at least 55% (to maintain control). Indian law required the public to own at least 25% of an IPO. This meant Fairfax would need to reduce its position to a ‘mere’ 20%.

 

Solution? Fairfax decided it was time to start their own P&C insurer in India. So, they partnered with Kamesh Goyal and brought start-up Digit into the Fairfax family. What a gutsy call this was at the time.

 

Indian law does not permit ownership of 10% or greater in more than one insurance company so an agreement was struck with ICICI Bank for Fairfax to reduce their interest in ICICI-Lombard to below 10%. In 2017, Fairfax reduced their equity interest in ICICI-Lombard from 35% to 9.9% and booked an after-tax gain of $930 million. Fairfax sold their remaining position in ICICI-Lombard in 2019 for $729 million and booked another $311 million gain. My guess is Fairfax earned more than $1.15 billion after-tax from its 20-year investment in ICICI-Lombard. Impressive value creation for shareholders.

 

Digit is now the property and casualty insurance engine for Fairfax in India. Growth has been rapid. In 2019, three private equity firms purchased 10% of Digit for $91 million; this valued the company at $858 million. In 2021, Digit raised another $200 million; this capital-raise valued the company at $3.5 billion. In 2021, Fairfax recorded a net unrealized gain of $1.4 billion on its investment in Digit compulsory convertible preferred shares (CCPS). Additionally, “The company anticipates recording additional gains of approximately $400 upon consolidating its investment in Digit, which is subject to regulatory approvals permitting the company to increase its 49.0% equity interest in Digit to a control position.” Fairfax is still waiting for final approval from Indian regulators (yes, this is understated… buy i am trying to keep this summary short).

 

From Prem’s Letter in the 2022AR: “Digit, led by Kamesh Goyal, had another strong year: after only five years since its inception, premiums are over $900 million, up 50% over the last 12 months in local currency, and with the benefit of investment income it had another profitable year. Digit entered the Fortune India magazine’s ranking of India’s 500 largest companies by total revenue during the year at 398th on the list – we expect that will move up going forward! Digit is exploring an IPO in 2023 which would fund future growth.”

 

At December 31, 2022, Digit had a cost of $154 million and a fair value of $2.28 billion = a compound annualized return of 79.5%. Fairfax looks exceptionally well positioned to grow in insurance in India with Digit.

 

----------

Next: 4.) A short history of Fairfax’s non-insurance investments in India

Edited May 24, 2023 by Viking

[Parsad]

Looks like FFH analyst estimates range from $790 USD to $1,346 USD.  So roughly $1,050 CDN to $1,790 CDN.  Pretty wide range, but I think that lower estimate marks the bottom of where shares should be trading.

 

https://finance.yahoo.com/news/analysts-just-cut-fairfax-financial-120606487.html

 

Cheers!

[SafetyinNumbers]

53 minutes ago, Parsad said:

Looks like FFH analyst estimates range from $790 USD to $1,346 USD.  So roughly $1,050 CDN to $1,790 CDN.  Pretty wide range, but I think that lower estimate marks the bottom of where shares should be trading.

 

https://finance.yahoo.com/news/analysts-just-cut-fairfax-financial-120606487.html

 

Cheers!

I don't think you like float enough Parsad! Or maybe I'm just more bullish on interest rates than you.

[Parsad]

12 minutes ago, SafetyinNumbers said:

I don't think you like float enough Parsad! Or maybe I'm just more bullish on interest rates than you.

 

No, I love float!  But I'm a cult follower of Ben Graham...margin of safety. 

 

If you are prepared for the worst, you usually will come out fine in a catastrophe and do well on the upside after. 

 

Cheers!

[SafetyinNumbers]

54 minutes ago, Parsad said:

 

No, I love float!  But I'm a cult follower of Ben Graham...margin of safety. 

 

If you are prepared for the worst, you usually will come out fine in a catastrophe and do well on the upside after. 

 

Cheers!

it’s ok if we stay perennially undervalued but with equity growing so fast, we’ll probably be rewarded with a P/BV above one despite your objections! 

[Parsad]

2 hours ago, SafetyinNumbers said:

it’s ok if we stay perennially undervalued but with equity growing so fast, we’ll probably be rewarded with a P/BV above one despite your objections! 

 

I would be perfectly fine if FFH just traded at book value as it grows.  I would rather see that than see something crazy like 2 times book value. 

 

I've got a lot of capital gains in my taxable accounts that I don't need to trade in and out of, and then pay taxes on those gains only to buy FFH back as it becomes undervalued again.  

 

Just grow at 15% per annum and stay priced at book value forever!    Cheers!

[SafetyinNumbers]

42 minutes ago, Parsad said:

 

I would be perfectly fine if FFH just traded at book value as it grows.  I would rather see that than see something crazy like 2 times book value. 

 

I've got a lot of capital gains in my taxable accounts that I don't need to trade in and out of, and then pay taxes on those gains only to buy FFH back as it becomes undervalued again.  

 

Just grow at 15% per annum and stay priced at book value forever!    Cheers!

No one is forcing you to trade Parsad! Congratulations on your gains. 

[Parsad]

Update on shipping industry.  Atlas was one of the few shipping companies to sign 3-5 year contracts when spot prices were high.  They should come out near the top of the pile over the next 2-3 years.  Cheers!

 

https://finance.yahoo.com/news/shipping-line-zim-gets-hammered-193702984.html

[nwoodman]

35 minutes ago, Parsad said:

Update on shipping industry.  Atlas was one of the few shipping companies to sign 3-5 year contracts when spot prices were high.  They should come out near the top of the pile over the next 2-3 years.  Cheers!

 

https://finance.yahoo.com/news/shipping-line-zim-gets-hammered-193702984.html

 

This is still ringing in my ears:

 

You have two types of rates. One is spot, the other is contract,” said Hapag-Lloyd CEO Rolf Habben Jansen on a call last August. “A contract means you commit yourself to a certain rate. There’s always a risk that during some periods, the spot rate is lower.

“That’s no reason to say, ‘OK, we will lower the contract rate. That would mean the contract rate is a combination of a [fixed] rate and a downward adjustment if the spot rate is lower. If you do that, there’s no reason to have contracts anymore. It wouldn’t make any sense. That’s why we have two types of rates.”

Zim clearly has a different view.

The company’s CFO, Xavier Destriau, confirmed on a call in November that the company’s May 2022-April 2023 trans-Pacific contracts were reset lower in an effort to maintain long-term customer relationships.

 

Good chance this gets ugly.  We said a while back that Seaspan needs to have some water-tight contracts in place when things turn.  Hopefully, as you are implying,  they are the strong hands here with loyal and sticky customers. Time will tell 

 

The FBX (global continer freight index) is a a beauty

 

 

https://fbx.freightos.com

Edited May 23, 2023 by nwoodman

[steph]

23 minutes ago, Parsad said:

Update on shipping industry.  Atlas was one of the few shipping companies to sign 3-5 year contracts when spot prices were high.  They should come out near the top of the pile over the next 2-3 years.  Cheers!

 

https://finance.yahoo.com/news/shipping-line-zim-gets-hammered-193702984.html

Hi Parsad, Atlas is a container shipping leasing company.  Just like Aercap is for aerplanes.  They will (normally) always lease for a number of years.  ZIM is a container shipping company, with long contracts and spot contracts with their clients.  ZIM is I believe the biggest client of Atlas.  ZIM is known to be a very aggressive and not so high quality player in the industry.  Luckily they made a lot of money recently.  But the risk is that if the downmarket is long they will have a hard time paying Atlas.  

 

[Parsad]

12 minutes ago, steph said:

Hi Parsad, Atlas is a container shipping leasing company.  Just like Aercap is for aerplanes.  They will (normally) always lease for a number of years.  ZIM is a container shipping company, with long contracts and spot contracts with their clients.  ZIM is I believe the biggest client of Atlas.  ZIM is known to be a very aggressive and not so high quality player in the industry.  Luckily they made a lot of money recently.  But the risk is that if the downmarket is long they will have a hard time paying Atlas.  

 

 

I would imagine any escape clause in the contracts probably has a significant penalty or fines.  Most of the ZIM contracts are LNG shipping 12-year contracts.  The fines must be pretty big for each year they default on the contract. 

 

It also wouldn't bode well for any future bids for Atlas' services by ZIM if they broke large contracts.  Thus why they are probably taking hits on other contracts at spot prices...probably 1-2 year contracts where they are breaking the terms rather than break a 12-year contract with Atlas. 

 

Cheers!  

[kab60]

Don't wanna make this about AIG, which I hold, but I think Renaissance RE are paying >2.2x BV for Validus RE.

 

Look at the press release from AIG:

 

AIG to Receive all Capital in Excess of $2.1 Billion of Shareholders’ Equity of Validus Re and Achieve Future Capital Synergies of Approximately $400 Million from the Recapture of Reserves as a Result of Transferring the Validus Re Balance Sheet to RenaissanceRe , which together, as of December 31, 2022 , was over $1.5 Billion ; Total Transaction Value to AIG is Expected to Exceed $4.5 Billion

 

https://aig.gcs-web.com/news-releases/news-release-details/aig-sell-validus-re-renaissancere

[glider3834]

11 minutes ago, kab60 said:

Don't wanna make this about AIG, which I hold, but I think Renaissance RE are paying >2.2x BV for Validus RE.

 

Look at the press release from AIG:

 

AIG to Receive all Capital in Excess of $2.1 Billion of Shareholders’ Equity of Validus Re and Achieve Future Capital Synergies of Approximately $400 Million from the Recapture of Reserves as a Result of Transferring the Validus Re Balance Sheet to RenaissanceRe , which together, as of December 31, 2022 , was over $1.5 Billion ; Total Transaction Value to AIG is Expected to Exceed $4.5 Billion

 

https://aig.gcs-web.com/news-releases/news-release-details/aig-sell-validus-re-renaissancere

I stand corrected thanks for the pick up! 

Edited May 23, 2023 by glider3834

[MMM20]

11 hours ago, Parsad said:

 

I would rather see that than see something crazy like 2 times book value. 

 

 

What if 2x BV is still a discount to IV? Ultimately don't we want their CoC to be fair? Match rate to risk!

[Viking]

On 5/22/2023 at 11:32 AM, Viking said:

After the US and Canada, India is Fairfax’s most important geography. In a world starved for growth, India is expected to be one of the fastest growing economies over the next decade. Morgan Stanley is projecting an economic boom in India (see below). Fairfax has repeatedly said they believe India is best country to invest in today. So, we should expect India to increase in importance for Fairfax investors in the coming years.

 

I thought it would be interesting to do a bit of a deep dive on India and Fairfax. Over the next few days I am planning to post on a number of topics:

 

1.) India: the big picture

 

I will then zoom into Fairfax and India

2.) Summary of current investments in India

3.) History: Insurance investments

4.) History: Non-insurance investments

5.) People

6.) Summary

 

-----------

1.) India: the big picture

 

India is exceptionally well positioned today:

• demographic tailwind: India has the largest population in the world, and it is very young with a median age of 28.2 years (China’s is 39). This should drive higher domestic consumption.
• regulatory tailwind: India has a pro-business government - ease of doing business in India is improving greatly. This should drive investment spending.
• geopolitical tailwind: companies are aggressively looking to diversify supply chains away from China - Apple’s plans to shift 25% of iPhone production to India being just one example

Many important building blocks are in place. This should result in very strong economic growth for India over the next decade. India looks positioned to finally realize its vast potential - it is no longer just a dream.

 

------------

Morgan Stanley: “India’s Impending Economic Boom: India is on track to become the world’s third largest economy by 2027, surpassing Japan and Germany, and have the third largest stock market by 2030, thanks to global trends and key investments the country has made in technology and energy.”

• https://www.morganstanley.com/ideas/investment-opportunities-in-india

The Future of India (this video was mentioned by Prem in his letter in the 2022AR)

 

Deepak Bagla, Managing Director & CEO, Invest India

• https://www.youtube.com/watch?v=45PrXujlQCo

----------

 

2.) Summary of Fairfax’s current investments in India

 

Fairfax's business model has much more of an international focus than most of its P&C insurance peers. This is true for both insurance and non-insurance investments. India is Fairfax's most important international market.

 

Fairfax does a good job of summarizing for shareholders all of their investments in India each year in the annual report. Below is the summary provided in the 2022AR. Key take-aways:

• Insurance investments (Digit) fair value = $2.3 billion
• Non-insurance investments fair value = $1.5 billion

Fairfax has a total of about $15 billion in equity investments. At Dec 31, 2022, non-insurance investments in India of $1.5 billion represented about 10% of Fairfax’s total.

 

 

----------

3.) A short history of Fairfax’s insurance investments in India

 

Fairfax began its insurance journey in India in 2000. That was the year the government in India opened up the property and casualty insurance industry to foreign investment. Fairfax partnered with ICICI Bank, a large private bank in India, and created a joint venture called ICICI-Lombard. Fairfax invested $10 million for an interest of 26% in the new venture, the maximum allowed by Indian law at the time.

 

ICICI-Lombard experienced rapid growth in the years that followed and by 2006, they had become the largest private general insurance company in India with a 12.5% market share. Over the years Fairfax made numerous capital infusions to support the growth of ICICI-Lombard and maintain their ownership at 26%.

 

In 2015, the Indian government allowed foreign ownership in insurance companies to increase to 49%. That year Fairfax purchased an additional stake of 9% in ICICI-Lombard from ICICI Bank for $234 million; this increased Fairfax’s ownership in ICICI-Lombard to 35%.

 

In 2017, ICICI Bank decided it was time to take ICICI-Lombard public. ICICI Bank wanted to maintain ownership of at least 55% (to maintain control). Indian law required the public to own at least 25% of an IPO. This meant Fairfax would need to reduce its position to a ‘mere’ 20%.

 

Solution? Fairfax decided it was time to start their own P&C insurer in India. So, they partnered with Kamesh Goyal and brought start-up Digit into the Fairfax family. What a gutsy call this was at the time.

 

Indian law does not permit ownership of 10% or greater in more than one insurance company so an agreement was struck with ICICI Bank for Fairfax to reduce their interest in ICICI-Lombard to below 10%. In 2017, Fairfax reduced their equity interest in ICICI-Lombard from 35% to 9.9% and booked an after-tax gain of $930 million. Fairfax sold their remaining position in ICICI-Lombard in 2019 for $729 million and booked another $311 million gain. My guess is Fairfax earned more than $1.15 billion after-tax from its 20-year investment in ICICI-Lombard. Impressive value creation for shareholders.

 

Digit is now the property and casualty insurance engine for Fairfax in India. Growth has been rapid. In 2019, three private equity firms purchased 10% of Digit for $91 million; this valued the company at $858 million. In 2021, Digit raised another $200 million; this capital-raise valued the company at $3.5 billion. In 2021, Fairfax recorded a net unrealized gain of $1.4 billion on its investment in Digit compulsory convertible preferred shares (CCPS). Additionally, “The company anticipates recording additional gains of approximately $400 upon consolidating its investment in Digit, which is subject to regulatory approvals permitting the company to increase its 49.0% equity interest in Digit to a control position.” Fairfax is still waiting for final approval from Indian regulators (yes, this is understated… buy i am trying to keep this summary short).

 

From Prem’s Letter in the 2022AR: “Digit, led by Kamesh Goyal, had another strong year: after only five years since its inception, premiums are over $900 million, up 50% over the last 12 months in local currency, and with the benefit of investment income it had another profitable year. Digit entered the Fortune India magazine’s ranking of India’s 500 largest companies by total revenue during the year at 398th on the list – we expect that will move up going forward! Digit is exploring an IPO in 2023 which would fund future growth.”

 

At December 31, 2022, Digit had a cost of $154 million and a fair value of $2.28 billion = a compound annualized return of 79.5%. Fairfax looks exceptionally well positioned to grow in insurance in India with Digit.

 

The beginning of my deep dive into Fairfax and India is linked above. The remaining pieces are contained below.

 

4.) A short history of Fairfax’s non-insurance investments in India

 

Fairfax’s first large non-insurance investment in India was Thomas Cook India in 2012. Modi’s election in 2014 led to Fairfax’s next big move - the creation of Fairfax India in 2015. As a result, we are going to split this short history into two buckets: Thomas Cook India and Fairfax India.

 

Thomas Cook India

 

In 2012 Fairfax purchased 87.1% of Thomas Cook India (TCI) for $172.7 million. This was Fairfax’s largest single purchase in India and the start of much more to come. At that time, Thomas Cook was designated the vehicle for Fairfax’s future non-insurance investments in India.

• In early 2013, TCI purchased 74% of IKYA - renamed Quess - (Founder CEO - Ajit Isaac) for $47 million.
• In 2014, TCI purchased Sterling Resorts for $140 million.
• In 2015, TCI purchased Kuoni India for $32.5 million and Kuoni Hong Kong for $47.9 million.

In 2017, Thomas Cook India sold 5.4% of Quess for $97 million. Thomas Cook India completed its spin-off of Quess (which became a stand alone company) in December of 2019. Fairfax’s direct ownership in Quess was 32% (at Dec 2019: cost = $33 million; market value $332 million; carrying value = $704 million).

----------

Prime Minister Narendra Modi’s election in 2014 caused an important change in Fairfax’s strategy with its investments in India. Given Modi’s election (and expected ‘business friendly policies’), Fairfax decided to accelerate the pace of its investing in India. However, Thomas Cook India’s resources were a constraint on growth. What to do? Fairfax made a significant pivot and decided to launch Fairfax India.

 

From Prem’s Letter 2014AR: “Mr. Modi’s election led us to rethink the investment opportunities in India and our ability to fund them. While we have $26 billion in investments at Fairfax, regulatory constraints limit our ability to invest significant amounts in India. Given our excellent long term track record investing in India, our very significant on the ground resources with Harsha Raghavan at Fairbridge, Madhavan Menon at Thomas Cook India, Ajit Isaac at Quess (the new name for IKYA), Ramesh Ramanathan at Sterling Resorts and also S. Gopalakrishnan, the long serving head of investments at ICICI Lombard, we felt it was appropriate to create a new public company, Fairfax India, to invest in India.”

 

Fairfax India

 

In 2015, the Fairfax India IPO raised $1.1 billion, $300 million from Fairfax (28% equity ownership and 95% of voting control at inception). In 2017 Fairfax India raised an additional $500 million; Fairfax participated and owned 30.1% of equity interest and 93.6% of the voting rights. Today, Fairfax owns 41.9% of Fairfax India.

 

Company Profile: “Fairfax India Holdings Corporation is an investment holding company publicly traded on the Toronto Stock Exchange whose investment objective is to achieve long-term capital appreciation, while preserving capital, by investing in public and private equity securities and debt instruments in India and Indian businesses or other businesses with customers, suppliers or business primarily conducted in, or dependent on, India.”

 

Fairfax India overview - powerpoint presentation from AGM on April 20, 2023

• https://s1.q4cdn.com/293822657/files/doc_presentations/2023/Fairfax-India-AGM-2023.pdf

 

From Prem’s Letter in 2022AR: “Since Fairfax India began, it has completed investments in 12 companies and exited one (14 currently as one has been split into four listed entities), all sourced and reviewed by Fairbridge, Fairfax’s wholly-owned sub-advisor in India. Fairbridge does outstanding work under the excellent leadership of CEO Sumit Maheshwari, supported by its Director Anish Thurthi, Vice President Sheetal Sancheti and analysts Jinesh Rambhia, Ramin Irani and Chinar Mathur. Fairfax India’s Mauritius subsidiary, FIH Mauritius Investments, ably led by its CEO Amy Tan, supported by its Vice President Vishal Mungur and its independent Board of Directors, is an integral part of the investment process. Also, since Fairfax India began, Deepak Parekh, both as a trusted advisor and a member of the Board of Directors, has provided us with invaluable advice on almost all of its transactions.”

 

“All of Fairfax India’s investments are in outstanding companies with a history of strong financial performance, led by founders and management who are not only excellent but also adhere to the highest ethical standards.“

 

Bangalore International Airport Limited (BIAL)

• Fairfax’s India’s largest and most important investment is Bangalore International Airport Limited (BIAL). At Dec 31, 2022 Fairfax had invested a total $653 million in BIAL which at that date had a fair value of $1.2 billion. Fairfax India just announced an additional purchase of 3% of BIAL from Siemens for $75 million and agreed to acquire an additional 7% later in 2023 (taking their ownership to 64%) for $175 million. This would take Fairfax India’s ownership in BIAL to 64%.
• “As I have said many times in past annual reports, the crown jewel (and largest) of Fairfax India’s investments is the Bangalore International Airport, run by Hari Marar. In 2022, Hari and his team did the impossible – they built the most beautiful airport in the world (Terminal 2 or T2) in a record four years, of which two were interrupted by COVID! In my mind, there is no airport in the world like T2 and it will be an inspiration for travellers arriving in Bangalore, the state of Karnataka and India. It will show the world anything is possible in India.”

Fairfax India’s performance:

 

 

Fairfax India’s Anchorage IPO:

• From Fairfax India’s 2022AR: “In June 2019, Fairfax India created a 100% owned subsidiary in India named Anchorage Infrastructure Investments Holdings (Anchorage). It is intended that this company will be Fairfax India’s flagship investment vehicle for airports and other infrastructure investments in India and that all the shares it owns in Bangalore International Airport (BIAL) will eventually be transferred to Anchorage.”
• “In September 2021, Fairfax India, as previously agreed, transferred 43.6% out of the 54% that it owns in BIAL to Anchorage and OMERS (the pension plan for municipal employees in the Province of Ontario, Canada) invested $129.2 million to acquire from Fairfax India an 11.5% interest on a fully diluted basis in Anchorage. This resulted in OMERS indirectly owning approximately 5% of BIAL. At that time, this transaction valued 100% of BIAL at $2.6 billion.“
• “Fairfax India intends to complete an IPO of Anchorage, although we did not move forward on this in 2022 as we are awaiting regulatory approvals.
• Once Anchorage is listed, the proportion of the publicly listed investments in Fairfax India will increase from the current 39.2% to 79.8% of the overall portfolio.”

Summary

 

Over the past 11 years, Fairfax has dramatically increased the number and size of its equity investments in India. It holds some of these investments directly. More recent investments are held primarily though Fairfax India, of which BIAL is the largest single holding. Anchorage is poised to be a growth vehicle for Fairfax India in the coming years. 

 

----------

List with press releases of most of Fairfax’s and Fairfax India’s transactions in India:

• https://fairbridgecapital.com/history.html

----------

5.) People

 

The CEO of Fairfax, Prem Watsa, was born and raised in India. Since at least 1995, Fairfax has had important resources allocated to India. In 2011, this commitment increased considerably with the creation of Fairbridge Capital which provides Fairfax with significant ‘boots on the ground’ resources in India.

 

Chandran Ratnaswami

 

Chandran is one of the true heroes of this story. He was hired by Fairfax in 1995. Currently a Senior Managing Director at Hamblin Watsa (responsible for East Asia), he is also CEO of Fairfax India. His fingers are all over Fairfax’s investments in India for the past 28 years.

 

Here is what Prem had to say in Fairfax’s 2017AR: “In 1995, Chandran Ratnaswami joined us to build our international insurance and common stock investments, particularly in India. I said then, ‘‘this may be an acorn for a future oak tree.’’ Well what an oak tree Chandran has developed! We, with ICICI Bank, created the largest non-government-owned property and casualty insurance company in India from scratch, managed an Indian investment portfolio with outstanding results for over 20 years, created Fairbridge with Harsha Raghavan as Managing Director, acquired a 77% interest in Thomas Cook India which then acquired Quess and Sterling Resorts, and finally created Fairfax India which now has a market value of $2.5 billion. Chandran was intimately involved with all of these activities and serves on most of the Boards of our Indian companies.”

 

Fairbridge Capital:

• https://fairbridgecapital.com

Established in 2011, Fairbridge is a subsidiary of Hamblin Watsa that researches and advises on Fairfax’s and Fairfax India’s investments in India.

 

From the Fairbridge Capital web site: “Fairbridge takes a long-term value approach towards acquisitions and investments in the Indian region. We focus on long-term capital appreciation through a flexible and value-oriented approach, underpinned by our guiding principles, including integrity, transparency and responsiveness in all our dealings. Our permanent capital base enables us to execute unique set of transactions; by taking a very long-term view, combined with the ability to execute highly flexible and creative deal structures.”

 

Fairfax also leverages the knowledge and expertise of the various founder/CEO’s of the companies it controls in India, like Thomas Cook (Madhaven Menon), Quess (Ajit Isaac) and others.

----------

Fairfax has been building out its ‘people’ capabilities in India for decades. Most importantly, it has a dedicated team, Fairbridge Capital, with deep local knowledge that is able to act as opportunities present themselves.

----------

6.) Summary

 

Fairfax’s investing strategy in India:

• Insurance: all insurance investments will be held at Fairfax.
• Legacy non-insurance investments, Thomas Cook and Quess, will remain at Fairfax.
• Most new non-insurance investments will be held at Fairfax India.

 

What have we learned about Fairfax and India?

• deep understanding of the country
• government deregulation is a significant driver of opportunity
• partner with strong founder/owners
• decentralized ownership structure
• supportive / very good partner
• long term focus
• strategic
• adaptive
• opportunistic
• entrepreneurial
• diversified

From the very beginning, Fairfax has excelled with both its insurance and non-insurance investments in India. This success is due primarily to the people talent Fairfax has amassed at Hamblin Watsa and Fairbridge Capital. It is like Fairfax has been quietly building out its capabilities in India… preparing and waiting for the right moment… and it appears that right moment may have arrived. If India is the top performing global economy over the next decade, Fairfax certainly looks very well positioned to capitalize on that growth.

 

Zig Ziglar quote: “Success occurs when opportunity meets preparation”

Edited May 24, 2023 by Viking

[Parsad]

14 hours ago, MMM20 said:

 

What if 2x BV is still a discount to IV? Ultimately don't we want their CoC to be fair? Match rate to risk!

 

It isn't.  Cheers!

[MMM20]

10 hours ago, Parsad said:

 

It isn't.  Cheers!

 

So am I out on an island (even here at the cobf!) arguing that IV is a mid-teens multiple of '23E earnings?

 

Of course it will probably never trade at ~2.5x BVPS again and instead by retaining earnings and unlocking embedded value, FFH will push BVPS higher over time and the stock will follow b/c that's how it trades.

 

But that doesn't mean IV isn't ~2.5x BVPS right now! That'd be a MKL-like multiple of earnings which in itself suggests FFH's BVPS understates earnings power - which recent moves like the pet insurance sale seem to support - and equate to an IMHO fair ~10-12% expected CAGR from that valuation. The IV math is simple and backed up by the more granular expected returns analysis.

 

I'm talking value to a permanent owner so I care about range of outcomes and not volatility, and I agree with most that the range of outcomes is wider for FFH, but that doesn't mean IV is necessarily lower! And that's the most common rebuttal I hear to this point, especially vis-a-vis a MKL.

 

I have no problem being alone with this view but I'm still trying to figure out what I'm missing b/c it seems like the fundamental shift in earnings power still widely misunderstood b/c they had a bad stretch in the early/mid 2010s and almost no one believes that it won't be repeated.

 

I don't want to get stuck in a groundhog's day loop here so sorry I keep coming back to this, but I really do believe it's the most important thing to figure out and I'm still trying to kill the thesis.

 

Edited May 24, 2023 by MMM20

[Thrifty3000]

2 hours ago, MMM20 said:

 

So am I out on an island (even here at the cobf!) arguing that IV is a mid-teens multiple of '23E earnings?

 

Of course it will probably never trade at ~2.5x BVPS again and instead by retaining earnings and unlocking embedded value, FFH will push BVPS higher over time and the stock will follow b/c that's how it trades.

 

But that doesn't mean IV isn't ~2.5x BVPS right now! That'd be a MKL-like multiple of earnings which in itself suggests FFH's BVPS understates earnings power - which recent moves like the pet insurance sale seem to support - and equate to an IMHO fair ~10-12% expected CAGR from that valuation. The IV math is simple and backed up by the more granular expected returns analysis.

 

I'm talking value to a permanent owner so I care about range of outcomes and not volatility, and I agree with most that the range of outcomes is wider for FFH, but that doesn't mean IV is necessarily lower! And that's the most common rebuttal I hear to this point, especially vis-a-vis a MKL.

 

I have no problem being alone with this view but I'm still trying to figure out what I'm missing b/c it seems like the fundamental shift in earnings power still widely misunderstood b/c they had a bad stretch in the early/mid 2010s and almost no one believes that it won't be repeated.

 

I don't want to get stuck in a groundhog's day loop here so sorry I keep coming back to this, but I really do believe it's the most important thing to figure out and I'm still trying to kill the thesis.

 

 

I think it's reasonable to model a normalized EPS of $100 USD going forward, which is clearly not priced into the shares. Where I get stuck is on growth rate and where normalized EPS will land in year 4 and beyond ( @Viking focuses on 2 to 3 years out, but I happen to enjoy wasting brain cells on rough 5 and 10 year forecasts).

 

Let's oversimplify and say after tax EPS breaks down neatly into 3 factors:

• $40 per share of insurance underwriting earnings at a combined ratio of 95
• $40 per share of interest income at an average yield of 3.5%
• $20 per share of non-insurance/interest earnings growing 10% annually
• Total Baseline EPS: $100

 

^ Notice $80 of earnings is tied to two CRITICAL variables entirely out of FFH's control; the insurance cycle and interest rates.

 

Now let's setup a conservative scenario for EPS in year 4. First, for simplicity's sake, let's assume that in years 1 through 3 a total of $300 per share was reinvested and results in additional earnings of $30 per share in year 4 (we'll call this 'earnings on reinvested cash'. Then, let's assume we're in a soft, mid-cycle, insurance rate environment, and that short term interest rates have declined to a level more in line with long term GDP growth potential.

 

Year 4 EPS Scenario:

• $30 per share of insurance underwriting earnings assuming modest premium volume growth and a CR of 98
• $20 per share of interest income at an average yield of 1.5%
• $60 per share of non-insurance/interest earnings (including $30 EPS from cash reinvested in yrs 1-3)
• Total Year 4 EPS: $110

^ Under that highly conservative, highly oversimplified, set of assumptions I can see a scenario where earnings remain relatively flat for at least the next 4 years.

 

From years 4 to 10 let's assume EPS grows 10% annually. That gives us the following EPS projections for years 5 and 10:

• Year 5 EPS: $121
• Year 10 EPS: $195

If we slap a 15x multiple on those conservative estimates we're looking at:

• Year 5 Share Price: $1,815
• Year 10 Share Price: $2,925

If you buy at $700 per share you're looking at a decent shot at a 15% return over the next 10 years. Not too shabby.

[Viking]

On 5/22/2023 at 2:26 PM, Parsad said:

Looks like FFH analyst estimates range from $790 USD to $1,346 USD.  So roughly $1,050 CDN to $1,790 CDN.  Pretty wide range, but I think that lower estimate marks the bottom of where shares should be trading.

 

https://finance.yahoo.com/news/analysts-just-cut-fairfax-financial-120606487.html

 

Cheers!

 

On May 12, RBC increased their price target for FFH from US$775 to US$875. 

 

"Our view: Q1 results were solid all around with continued top-line growth, low 90s combined ratios, modest cat losses and continued strong growth of investment and associate income. Management has taken steps to lock in investment income for the next couple of years and combined with a still very favorable underwriting environment provides unusually high visibility to Fairfax earnings. With shares still trading at a discount to book value (even after solid gains last year) we continue to find Fairfax shares as among the most attractive opportunities in the P&C insurance space. We remain at Outperform."

 

What I found especially interesting with the RBC report is they are politely telling investors to get their head out of their asses when it comes to looking at Fairfax's business today. It is not your fathers Fairfax. Their investment portfolio is best in class. And their underwriting is good. And this is how sentiment changes... slowly over time...

 

"Investment income/investment positioning: ...Naturally there can be offsets from non-fixed income results and any related impairments but we think the investment positioning here is actually contrary to what many investors might expect. Which is to say normally investors view Fairfax as having a portfolio with a lot of complex exposures. While there is some truth to this on the equity and associate side of the book, that comprises only 25% of the portfolio – the remaining 75% of cash and fixed income is much more conservative than the average investment portfolio and this isn’t reflected in current valuations, in our view."

 

"Combined ratio/premium growth: ...As we noted last quarter we think underwriting is an under-recognized strength of Fairfax."

[MMM20]

35 minutes ago, Thrifty3000 said:

$20 per share of interest income at an average yield of 1.5%

Super conservative!

[Thrifty3000]

45 minutes ago, MMM20 said:

Super conservative!

 

Fair enough, let's double interest income from $20 to $40 EPS in Year 4. That gives us a total year 4 EPS estimate of $130...

 

Year 5 EPS: $143

Year 10 EPS: $230

 

15X Multiple:

 

Year 5: $2,145

Year 10: $3,450

 

If you double the interest rate assumption it increases the 10 year return from 15% to 17%.

[Thrifty3000]

54 minutes ago, MMM20 said:

Super conservative!

 

For what it's worth, when I modeled FFH's normalized earnings potential back in 2020 I had it pegged between $28 and $35 per share, so I've been guilty of being a smidge conservative in the past as well.

[racemize]

I mean the real issue is that if anything like the last 10 years happens again, it should not trade at 2x book value.    

[Viking]

Looking out 4 and 5 years certainly is a challenging exercise. At a very high level, here are what i think are some of the the key metrics:

1.) net premiums earned?

2.) CR?

3.) size of investment portfolio?

4.) rate of return on investment portfolio?

5.) shares outstanding? (I would model this to drop by 2% per year on average for the next 5 years given the significant amount of cash coming in each year and how cheap the shares are).

 

The CR and the rate of return will have to sum to a number that allows an insurance company to earn an acceptable ROE = min 10-12%. This is not specific to Fairfax. 
 

So the only way the ‘normalized’ CR goes to 98% is if the return on investments is high, perhaps 7 or 8% (i haven’t run the numbers). Likewise, if the ‘normalized’ return on investments is 3% then the CR will need to be under 95%. Yes, you could get very short periods where strange things happen… but that is not ‘normalized’, but more likely a bull or bear scenario.
 

Insurance companies (as a group) will need to earn an acceptable ROE on average over the medium term. Otherwise investors will exit and their share prices will crater. No CEO will let that happen (for a ‘normalized’ or extended amount of time). Super low share prices (over an extended period) would likely lead to the next great consolidation of the industry.

 

Edited May 24, 2023 by Viking

[glider3834]

On 5/23/2023 at 8:20 PM, kab60 said:

Don't wanna make this about AIG, which I hold, but I think Renaissance RE are paying >2.2x BV for Validus RE.

 

Look at the press release from AIG:

 

AIG to Receive all Capital in Excess of $2.1 Billion of Shareholders’ Equity of Validus Re and Achieve Future Capital Synergies of Approximately $400 Million from the Recapture of Reserves as a Result of Transferring the Validus Re Balance Sheet to RenaissanceRe , which together, as of December 31, 2022 , was over $1.5 Billion ; Total Transaction Value to AIG is Expected to Exceed $4.5 Billion

 

https://aig.gcs-web.com/news-releases/news-release-details/aig-sell-validus-re-renaissancere

Just having another look at this - AIG are paying a dividend out of Validus re prior to close so thats included in transaction value , but from M&A perspective this sale of Validus Re is priced at

 

1.4 x tangible BV  & 1.1 x GPW of $2.7B in 2022 with 95 combined ratio

 

'Total consideration for the transaction is $2.985 billion, equal to 1.42x Validus' tangible equity of $2.1 billion to be delivered to RNR at closing, with any excess to be retained by AIG.'

https://www.fitchratings.com/research/insurance/fitch-affirms-renaissanncere-ratings-following-validus-re-acquisition-announcement-outlook-stable-23-05-2023

 

The expected property GPW of the company will be approximately $900 million. For casualty and specialty, GPW is expected to be roughly $1.8 billion, with RenRe stating that the combined ratio will be in line with the existing portfolio, at around 95%.

https://www.reinsurancene.ws/renres-gpw-poised-to-expand-by-30-to-12bn-following-validus-re-acquisition/

 

Worth noting too that Validus Re increased premiums by 40% in Q1'23 so that likely would be factored in too

https://www.reinsurancene.ws/validus-re-premiums-up-40-significant-rate-increases-expected-in-june-aig-ceo-zaffino/

 

In addition, AIG will retain 95% of the development on Validus Re’s net reserves at closing, mitigating RenaissanceRe’s balance sheet risk.

https://www.reinsurancene.ws/moodys-affirms-a-stable-outlook-for-renre-post-acquisition-of-aigs-validus-re/

 

 

 

 

 

 

Edited May 24, 2023 by glider3834