Fairfax 2023

[SafetyinNumbers]

2 hours ago, Haryana said:

 

Mere fundamentals like including dividends when comparing is likely more important than advanced jargon like sharpe ratio.

 

Sleepydragon is explaining why BRK has a premium valuation to FFH based on how it trades but not based on expected returns. A lot of people don’t own Fairfax for this reason but it’s not a good reason for long term investors.
 

"Warren Buffett always puts it best: 'We prefer a lumpy 15% return to a smooth 12% return.' Investors who’d rather have the reverse...should ask themselves whether their aversion to volatility is mostly financial or mostly emotional."

— Howard Marks

 

 

Edited July 4, 2023 by SafetyinNumbers

[Parsad]

4 hours ago, Munger_Disciple said:

I was re-reading Prem's 2022 annual letter & he shows a table of gross premiums written and float from 1985 to 2022. I noticed that the ratio of float/gross premiums written has shrunk from 2.4 in 2010 to 1.1 in 2022. It used to be roughly 1.6 in the decade prior to 2010.

 

Dos this mean that Fairfax is writing a lot more short tail insurance these days compared to the past? 

 

 

Might be due to a couple of reasons:

• Recent acquisitions like Brit and Allied are more diverse, rather than pure reinsurers.
• Sold run-off businesses that probably had more long-tail claims.
• Didn't really enjoy a hard insurance market for a number of years until 2022.

Cheers!

[sleepydragon]

13 hours ago, SafetyinNumbers said:

Sleepydragon is explaining why BRK has a premium valuation to FFH based on how it trades but not based on expected returns. A lot of people don’t own Fairfax for this reason but it’s not a good reason for long term investors.
 

"Warren Buffett always puts it best: 'We prefer a lumpy 15% return to a smooth 12% return.' Investors who’d rather have the reverse...should ask themselves whether their aversion to volatility is mostly financial or mostly emotional."

— Howard Marks

 

 

yeah, I own both Brk and FFH. I am just saying for mom and pop investors it’s easier to hold on to Brk. Brk’s price is more stable also because Brk’s execution is more consistent. But I bought because like Vikings said the past hedging program hid the true earning power of the business.

[Luke]

31 minutes ago, sleepydragon said:

yeah, I own both Brk and FFH. I am just saying for mom and pop investors it’s easier to hold on to Brk. Brk’s price is more stable also because Brk’s execution is more consistent. But I bought because like Vikings said the past hedging program hid the true earning power of the business.

I just worry that at a 700b Marketcap, outperforming will get harder and harder for BRK. 

[jbwent63]

19 hours ago, Haryana said:

 

https://www.morningstar.com/stocks/pinx/frfhf/chart

 

 

 

I'm not sure if its me or not. Did BRK.A not close at June 30 with a price of $517,810 and the B share at $341? I'm not sure why Morningstar would be showing $459,210 as a closing value for the A shares on the same date.

[Munger_Disciple]

14 hours ago, Parsad said:

 

Might be due to a couple of reasons:

• Recent acquisitions like Brit and Allied are more diverse, rather than pure reinsurers.
• Sold run-off businesses that probably had more long-tail claims.
• Didn't really enjoy a hard insurance market for a number of years until 2022.

Cheers!

 

Thanks @Parsad, makes sense to me. I would think that even in the current hard insurance market, they are likely writing more short tail insurance.

Edited July 4, 2023 by Munger_Disciple

[newtovalue]

Look at Eurobank GO!  Almost close to taking out the May 22 high.

 

Almost $100 per share CAD in EUROBANK exposure here (if it was MTM). Wonder what the long term play is here for Fairfax? 

 

 

[gfp]

5 hours ago, jbwent63 said:

I'm not sure if its me or not. Did BRK.A not close at June 30 with a price of $517,810 and the B share at $341? I'm not sure why Morningstar would be showing $459,210 as a closing value for the A shares on the same date.

 

The way morningstar's chart works, they are telling you that Berkshire's A shares increased by that dollar amount during the period.  It isn't the closing price.

[Haryana]

21 hours ago, SafetyinNumbers said:

Sleepydragon is explaining why BRK has a premium valuation to FFH based on how it trades but not based on expected returns. A lot of people don’t own Fairfax for this reason but it’s not a good reason for long term investors.
 

"Warren Buffett always puts it best: 'We prefer a lumpy 15% return to a smooth 12% return.' Investors who’d rather have the reverse...should ask themselves whether their aversion to volatility is mostly financial or mostly emotional."

— Howard Marks

 

 

 

So Warren Buffett himself is teaching us against the use of risk-adjusted return (Sharpe ratio) but we are still looking for an excuse to use the Sharpe ratio to justify our reverence for the one and only, the chosen one, the Prophet (Oracle of Omaha). This is wonderful.

 

[LC]

Here's a question: 

 

If you accept that the stock price is a rough estimation of intrinsic value (over a long time horizon), is it reasonable to accept stock price volatility as a rough estimation of intrinsic risk over a similarly long time horizon?

Edited July 4, 2023 by LC

[gfp]

It's pretty great that the corner of Berkshire and Fairfax message board was named after two securities that are almost tied in performance this millennium, with the smaller up-and-comer, Fairfax, clocking in at 846% vs. Berkshire's 826%.  Going forward it is likely that Fairfax will continue to outperform Berkshire over long periods due primarily to the size difference.  Unfortunately my dividends are taxed so Berkshire is ahead for this taxable American.

 

Edited July 4, 2023 by gfp

[Munger_Disciple]

7 minutes ago, glider3834 said:

yes 

 

my table below - data taken from annual reports

 

 

That's outstanding @glider3834, great detective work!

[glider3834]

On 7/4/2023 at 10:14 AM, Munger_Disciple said:

I was re-reading Prem's 2022 annual letter & he shows a table of gross premiums written and float from 1985 to 2022. I noticed that the ratio of float/gross premiums written has shrunk from 2.4 in 2010 to 1.1 in 2022. It used to be roughly 1.6 in the decade prior to 2010.

 

Dos this mean that Fairfax is writing a lot more short tail insurance these days compared to the past? 

 

yes 

 

my figures below - from annual reports

 

edit note: accidentally deleted so re-posting

 

[glider3834]

3 minutes ago, Munger_Disciple said:

 

That's outstanding @glider3834, great detective work!

[sholland]

On 6/19/2023 at 11:27 AM, This2ShallPass said:

To the insurance experts on the board, can you pls suggest 2-3  companies that are close to Fairfax from hurricane exposure standpoint? 

 

I'm giddy about Fairfax prospects over the next few years as well. But it's ~30% of my pf and I want to be prudent, so planning to take small otm hedge to reduce my losses in a worst case event.

 

You might want to look at shorting Florida insurer UVE. I shorted it (unprofitably) in 2017, 2018, and 2019 on the belief that 1) the Florida Legislature passed laws that screwed up the market and 2) a repeat of the following hurricanes would bankrupt the company:

 

Repeat of 1926 Miami Hurricane

Repeat of 1928 Great Okeechobie Hurricane

Repeat of 1947 Fort Lauderdale Hurricane

Repeat of 1992 Hurricane Andrew

 

I can provide more information if this is something you are interested in as I believe the Florida insurance situation has not changed much since I last looked at in 2019. 

[Parsad]

11 hours ago, Luca said:

I just worry that at a 700b Marketcap, outperforming will get harder and harder for BRK. 

 

That's what I thought too!  Until Apple burst through 2T and kept compounding to 3T!

 

It will get tougher and slower for BRK to find investments.  But a lot of their core holdings, including their amazing insurance businesses, should keep the pot growing for another century.

 

Cheers!

[Parsad]

5 hours ago, newtovalue said:

Look at Eurobank GO!  Almost close to taking out the May 22 high.

 

Almost $100 per share CAD in EUROBANK exposure here (if it was MTM). Wonder what the long term play is here for Fairfax? 

 

 

 

The funny thing is that Eurobank may still be considerably undervalued!  Should trade at book or better over the next couple of years.  That being said, I wouldn't mind if they take a little off the table here.

 

Cheers!

[Parsad]

3 hours ago, LC said:

Here's a question: 

 

If you accept that the stock price is a rough estimation of intrinsic value (over a long time horizon), is it reasonable to accept stock price volatility as a rough estimation of intrinsic risk over a similarly long time horizon?

 

You could, but look at the volatility of META, AMZN, TSLA and even COST over the last 10+ years.  These stalwarts and outperformers today had periods of extreme volatility.  Was COST really as risky as the others?  Cheers!

[Parsad]

3 hours ago, Haryana said:

 

Parsad Sir, Happy Birthday!

 

(just a note that your chart likely included the dividends and that is a good thing, thanks)

 

 

Thank you Haryana...another year, another ring on the old trunk!  Cheers!

[Xerxes]

1 hour ago, Parsad said:

 

Thank you Haryana...another year, another ring on the old trunk!  Cheers!

happy birthday champ !!

all the best 

[Parsad]

1 hour ago, Xerxes said:

happy birthday champ !!

all the best 

 

Thanks Xerxes!

[Viking]

Of all of the many positive developments at Fairfax over the past 18 months, the spike in interest rates (and subsequent increase in interest income) is the most exciting for shareholders. That is because the interest and dividend bucket is now the biggest driver of earnings for Fairfax.

 

Fairfax has done a masterful job over the past 2 years of navigating the extreme volatility we have seen in interest rates. In Q4 2021, Fairfax did two things: they moved their average duration to 1.2 years and shifted their fixed income portfolio to high quality government securities. In 2022, as interest rates spiked higher, they began extending duration - in Q4, 2022 the average duration had been increased to 1.6 years. The positioning in late 2021 protected Fairfax’s balance sheet when interest rates spiked in 2022 (saving them billions in unrealized losses). It also allowed them to quickly take advantage of much higher interest rates. As a result, Fairfax earned record interest and dividend income in 2022. And 2023 is going to blow 2022 out of the water.  

 

What did we learn when Fairfax reported Q1 results?

 

The big news was they had pushed the average duration of their fixed income portfolio out to 2.5 years. This is a significant development. Because it means the record interest and dividend income will continue for 2023, 2024 and into 2025 - this earnings stream is now predictable and durable. Investors and analysts like this.

 

What did we learn in Q2?

 

We learned four very important things in Q2:

 

1.) Central banks are not done raising interest rates. This is because inflation (especially core readings) is still too high. And parts of the economy are starting to grow again (like housing) and employment remains tight. So, some central banks who had paused rate hikes in early 2023, like Canada and UK, have been forced to start hiking rates again. And despite the recent pause, Powell has telegraphed the Fed will be hiking the US rates at least one more time (and likely two) in the coming months.

 

In addition to the US, Fairfax has significant fixed income holdings in Canada, the UK and Europe. The average duration of their fixed income portfolio is still quite low at 2.5 years (especially when compared to peers, who are closer to 4 years). A higher for longer interest rate regime means Fairfax will be able to roll their maturing bonds into higher yielding securities - which should deliver even higher interest income.

 

2.) Interest rates are rising again. It looked like treasury yields peaked out March 8 in the US. At the end of March yields had plummeted. Fast forward three months to the end of June and treasury yields have spiked higher, with durations of 3 years and less setting new highs.

 

Fairfax is being given another opportunity to increase the average duration of their fixed income portfolio if they want to. Doing so would lock in meaningful interest income beyond 2025. This will be something to monitor when they report Q2 results. 

 

3.) Higher interest rates are causing parts of the financial market to crack, with the meltdown in US regional banks in April the most recent example. Some regional banks have been forced to sell loans at a heavy discount to raise liquidity. In partnership with Fairfax, Kennedy Wilson purchased $2.3 billion (face value) in loans from PacWest Bank. Fairfax will earn 10% on its $2 billion investment, which will generate about $200 million annually in interest income (mostly) and investment gains. I think we can assume Fairfax is likely earning an incremental 5% on this investment (if we assume they were earning 5% on their old investment) so this should result in about $100 million in incremental interest income per year beginning in July (+$25 million per quarter). 

 

4.) Dividend income is headed higher. Extending its close partnership with Kennedy Wilson, Fairfax also invested $200 million in preferred shares with a 6% dividend. This will deliver an incremental $12 million in dividend income to Fairfax each year. (As part of the deal, Fairfax also received warrants for 12.3 million shares of KW with a strike price of $16.21.)

 

Fairfax has most of its fixed income portfolio in government bonds. One of the big advantages of this positioning in the current environment is it allows Fairfax to be very opportunistic to quickly take advantage of temporary market dislocations, like we have just seen with the KW/PacWest transaction. Smart.

 

As central banks continue to increase interest rates it is possible the US could enter a recession later in 2023 or 2024. If this happens it is normal for credit spreads to dramatically widen. Fairfax has stated they are ready to shift a chunk of their fixed income portfolio from government into corporate bonds should yields on the latter pop higher. The cat is ready to pounce.     

 

Over the past 20 months we have been getting a master-class from Fairfax on the benefits of active management of a fixed income portfolio.

 

What does all this mean for Fairfax?

 

Record interest and dividend income is going even higher. The already good ‘fundamentals’ of Fairfax continue to get better.

 

What do the actual numbers look like?

 

Interest and Dividend Income:

• 2021 = $641 million ($27/share).
• 2022 = $962 million ($41/share) = 54% increase YOY.
• 2023E = $1.674 billion ($73/share) = 76% increase YOY.

Fairfax’s share price is $753. The company is trading today for 10 x 2023E interest and dividend income. Compare that to any other insurer… that is NUTS. Especially given the durability of this earnings stream and the quality of the bond portfolio.

 

—————

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

 

Interest income:

• Fairfax has a fixed income portfolio of about $40 billion. Interest income will come in around $1.59 billion in 2023 = yield of 3.98%. This is up from 2.25% in 2022 and 1.54% in 2021.

Dividend income:

• Fairfax currently earns about $135 to $140 million per year in dividends from its equity holdings.

Investment expenses:

• Fairfax incurred investment expenses of $52 million in 2022, up from $36 million in 2021. My estimate for 2023 is $52 million.

FYI, Fairfax did not break out interest, dividends and investment expenses when they reported Q1 earnings (they just reported the total number). So some guesswork as to the split will be needed moving forward.

 

 

Check out the unbelievable move in Treasury yields over the past 18 months from Jan 1, 2022 to June 30, 2023.

 

 

Edited July 5, 2023 by Viking

[UK]

16 minutes ago, Viking said:

Of all of the many positive developments at Fairfax over the past 18 months, the spike in interest rates (and subsequent increase in interest income) is the most exciting for shareholders. That is because the interest and dividend bucket is now the biggest driver of earnings for Fairfax.

 

Fairfax has done a masterful job over the past 2 years of navigating the extreme volatility we have seen in interest rates. In Q4 2021, Fairfax did two things: they moved their average duration to 1.2 years and shifted their fixed income portfolio to high quality government securities. In 2022, as interest rates spiked higher, they began extending duration - in Q4, 2002 the average duration had been increased to 1.6 years. The positioning in late 2021 protected Fairfax’s balance sheet when interest rates spiked in 2022 (saving them billions in unrealized losses). It also allowed them to take advantage of much higher interest rates. As a result, Fairfax earned record interest and dividend income in 2022. And 2023 is going to blow 2022 out of the water.  

 

What did we learn when Fairfax reported Q1 results?

 

The big news was they had pushed the average duration of their fixed income portfolio out to 2.5 years. This is a significant development. Because it means the record interest and dividend income will continue for 2023, 2024 and into 2025 - this earnings stream is now predictable and durable. Investors and analysts like this.

 

What did we learn in Q2?

 

We learned four very important things in Q2:

 

1.) Central banks are not done raising interest rates. This is because inflation (especially core readings) is still too high. And parts of the economy are starting to grow again (like housing) and employment remains tight. So, some central banks who had paused rate hikes in early 2023, like Canada and UK, have been forced to start hiking rates again. And despite the recent pause, Powell has telegraphed the Fed will be hiking the US rates at least one more time (and likely two) in the coming months.

 

In addition to the US, Fairfax has significant fixed income holdings in Canada, the UK and Europe. The average duration of their fixed income portfolio is still quite low at 2.5 years (especially when compared to peers, who are closer to 4 years). A higher for longer interest rate regime means Fairfax will be able to roll their maturing bonds into higher yielding securities - which should deliver even higher interest income.

 

2.) Interest rates are rising again. It looked like treasury yields peaked out March 8 in the US. At the end of March yields had plummeted. Fast forward three months to the end of June and treasury yields have spiked higher, with durations of 3 years and less setting new highs.

 

Fairfax is being given another opportunity to increase the average duration of their fixed income portfolio if they want to. Doing so would lock in meaningful interest income beyond 2025.

 

3.) Higher interest rates are causing parts of the financial market to crack, with the meltdown in US regional banks in April the most recent example. Some regional banks have been forced to sell loans at a heavy discount to raise liquidity. In partnership with Fairfax, Kennedy Wilson purchased $2.3 billion (face value) in loans from PacWest Bank. Fairfax will earn 10% on its $2 billion investment, which will generate about $200 million in interest income (mostly) and investment gains (expected 10% total return).

 

4.) Dividend income is headed higher. Extending its close partnership with Kennedy Wilson, Fairfax also invested $200 million in preferred shares with a 6% dividend. This will deliver an incremental $12 million in dividend income to Fairfax each year. (As part of the deal, Fairfax also received warrants for 12.3 million shares of KW with a strike price of $16.21.)

 

Fairfax has most of its fixed income portfolio in government bonds. One of the big advantages of this positioning in the current environment is it allows Fairfax to be very opportunistic to quickly take advantage of temporary market dislocations, like we have just seen with the KW/PacWest transaction. Smart.

 

As central banks continue to increase interest rates it is possible the US could enter a recession later in 2023 or 2024. If this happens it is normal for credit spreads to dramatically widen. Fairfax has stated they are ready to shift a chunk of their fixed income portfolio from government into corporate bonds should yields on the latter pop higher. The cat is ready to pounce.     

 

Over the past 20 months we have been getting a master-class from Fairfax on the benefits of active management of a fixed income portfolio.

 

What does all this mean for Fairfax?

 

Record interest and dividend income is going even higher. The already good ‘fundamentals’ of Fairfax continue to get better.

 

What do the actual numbers look like?

 

Interest and Dividend Income:

• 2021 = $641 million ($27/share).
• 2022 = $962 million ($41/share) = 54% increase YOY.
• 2023E = $1.674 billion ($73/share) = 76% increase YOY.

Fairfax’s share price is $753. The company is trading today for 10 x 2023E interest and dividend income. Compare that to any other insurer… that is NUTS. Especially given the durability of this earnings stream and the quality of the bond portfolio.

 

—————

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

 

Interest income:

• Fairfax has a fixed income portfolio of about $40 billion. Interest income will come in around $1.59 billion in 2023 = yield of 3.98%. This is up from 2.25% in 2022 and 1.54% in 2021.

Dividend income:

• Fairfax currently earns about $135 to $140 million per year in dividends from its equity holdings.

 

Investment expenses:

• Fairfax incurred investment expenses of $52 million in 2022, up from $36 million in 2021. My estimate for 2023 is $52 million.

FYI, Fairfax did not break out interest, dividends and investment expenses when they reported Q1 earnings (they just reported the total number).

 

 

Check out the unbelievable move in Treasury yields over the past 18 months from Jan 1, 2022 to June 30, 2023.

 

 

 

Viking, thank you for sharing you analysis and thinking on FFH! Given you extensive knowledge and conviction on possible opportunity with FFH still present, may I ask you, what are your thoughts on position sizing with FFH? Given that FFH is still an insurance and somewhat levered company, what would be max position size in FFH you could still sleep well with? 

 

[Viking]

2 hours ago, UK said:

 

Viking, thank you for sharing you analysis and thinking on FFH! Given you extensive knowledge and conviction on possible opportunity with FFH still present, may I ask you, what are your thoughts on position sizing with FFH? Given that FFH is still an insurance and somewhat levered company, what would be max position size in FFH you could still sleep well with? 

@UK i will give you a portfolio update as of today. But please note, i am ok with concentrated positions. This strategy has worked well for me for +20 years but it is not for everyone. Please note, I might decide to change my position tomorrow and i will not provide an update. I have no desire to provide daily, weekly or monthly portfolio updates. Because it messes with my head too much (i start to feel responsible for everyone else). People need to do their own research. And come to their own conclusions. And not get overly influenced by what some anonymous blogger is posting. 
 

Having got that out of the way, Fairfax has been may largest position since late 2020. ‘The story’ at the company continues to improve every quarter. As a result, despite the incredible run-up, i think the stock is still dirt cheap. So i continue to hold a concentrated position. I consider 30% to be a minimum position for me today (given what i know today). Currently i am at a 45% weighting. And I move around quite a bit (around the edges). 
 

I am also 35% cash today. The remainder is split pretty evenly between 3 other buckets: oil, banks and Canadian high yielding dividend stocks. I move around i these holdings quite a bit.
—————

If you look at most successful investors most of their outperformance was the result of only a couple of holdings that performed spectacularly well over 5 or 10 years. 
 

My view is these turbocharged opportunities only come along every couple of years (something you understand very well that is dirt cheap with catalysts). So when you find one you have to be patient and ride it for as long as possible. Because the next one might be years away.
 

My fear right now with Fairfax isn’t holding too much… it is holding too little. My fear is lightening up (locking in big gains) and then having the stock take off higher on me.
 

My biggest mistake investing is selling my big winners too early. Selling because they went up a lot. And then they kept going higher… My mistake was selling using price as my guide. So i am trying to be more patient in situations where the fundamentals continue to improve - like the situation with Fairfax today.

—————

My average return over the past 20 years is 19% per year. Over that 20 year span i have had two down years (of -4% each year). So my strategy works for me. I also spend LOTS of time on investing… because i really enjoy it.
 

People need to figure out their own strategy. Something that fits their knowledge, emotional make-up, situation, interest, time etc.  There are no short cuts. 

Edited July 5, 2023 by Viking

[Luke]

8 hours ago, Parsad said:

 

That's what I thought too!  Until Apple burst through 2T and kept compounding to 3T!

 

It will get tougher and slower for BRK to find investments.  But a lot of their core holdings, including their amazing insurance businesses, should keep the pot growing for another century.

 

Cheers!

Yeah true, lots of juice left to be squeezed!