Fairfax 2023

[UK]

3 hours ago, Viking said:

@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. 

 

Thanks very much for your answer!

 

[dartmonkey]

18 hours ago, Parsad said:

 

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!

 

Agreed. Remembering the successful Bank of Ireland investment, they purchased 8.7% in 2011 for 0.10 eurs, and sold most of it in 2014 and 2015 for between 0.33 and 0.36 euros, and cut it further from 2.9% to 1.5% in 2016, and the rest in 2017, for a total profit of over $1b US. (In the 2002 AR, Watsa called Richie Boucher from the Bank of Ireland Fairfax's 'first billion dollar man', with George Chryssikos's of Grivalia and Eurobank having his name added to this illustrious list. Interestingly, Boucher was on Eurobank's board from 2017 to 2020, so maybe it's contagious.)

 

Anyways, the Bank of Ireland has not done much since 2017, going from about 8 euros to 9, and paying out 0.67 euros since then. Hopefully, Eurobank will not suffer the same fate, but if Fairfax lightens its investment a bit, there would be a good precedent.

[maxthetrade]

13 hours ago, Viking said:

@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. 

 

Awesome post Viking! Like you I'm more concerned that I don't own enough FFH.

[Munger_Disciple]

23 hours ago, gfp said:

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.

 

 

In the case of Fairfax, the CAGR seems to a very strong function of the start date of one's investment even in the very long term. If you zoom out a bit further, the chart looks like this in CAD (it hit a local peak of $540 CAD in 1998). If one invested in Fairfax on 1/1/1999 and kept it until 6/30/2023 for example, the CAGR after 24.5 years is only 4.54%. On the other hand, if you invested in FFH on 1/1/2003 and kept it till 6/30/23, CAGR jumps to 13.4% over the 20.5 year period. 

 

Edited July 5, 2023 by Munger_Disciple

[maxthetrade]

16 minutes ago, Munger_Disciple said:

If one invested in Fairfax on 1/1/1999 and kept it until 6/30/2023 for example, the CAGR after 24.5 years is only 4.54%. On the other hand, if you invested in FFH on 1/1/2003 and kept it till 6/30/23, CAGR jumps to 13.4% over the 20.5 year period. 

 

Yes, the price you pay is important! I still own some shares that I bought in 2003 in a tax free account. I can't sell them without loosing the tax free status so I'll hold them as long as I see an reasonable future return compared to other after tax opportunities.

[Munger_Disciple]

37 minutes ago, maxthetrade said:

 

Yes, the price you pay is important! I still own some shares that I bought in 2003 in a tax free account. I can't sell them without loosing the tax free status so I'll hold them as long as I see an reasonable future return compared to other after tax opportunities.

 

Of course the price you pay counts. The surprising thing is that even after 25 years, the returns were really poor after the purchase in 1999. I guess FFH was way overvalued in 1998-1999 time frame. 

[treasurehunt]

58 minutes ago, Munger_Disciple said:

 

In the case of Fairfax, the CAGR seems to a very strong function of the start date of one's investment even in the very long term. If you zoom out a bit further, the chart looks like this in CAD (it hit a local peak of $540 CAD in 1998). If one invested in Fairfax on 1/1/1999 and kept it until 6/30/2023 for example, the CAGR after 24.5 years is only 4.54%. On the other hand, if you invested in FFH on 1/1/2003 and kept it till 6/30/23, CAGR jumps to 13.4% over the 20.5 year period. 

 

 

Yes, the stock price has historically been very volatile. Perhaps it is better to look at changes in book value per share (plus dividends) to get a better idea of how the business has been doing over time.

 

[Viking]

1 hour ago, Munger_Disciple said:

 

In the case of Fairfax, the CAGR seems to a very strong function of the start date of one's investment even in the very long term. If you zoom out a bit further, the chart looks like this in CAD (it hit a local peak of $540 CAD in 1998). If one invested in Fairfax on 1/1/1999 and kept it until 6/30/2023 for example, the CAGR after 24.5 years is only 4.54%. On the other hand, if you invested in FFH on 1/1/2003 and kept it till 6/30/23, CAGR jumps to 13.4% over the 20.5 year period. 

 

 

@Munger_Disciple I do not spend a great deal of time looking far into the past. It is interesting/fun to do. What I really care about is the future. My guess is Fairfax should easily outperform Berkshire moving forward. And by a lot. There are a couple of reasons for this:

1.) Fairfax is way underpriced - probably 30% or more. Berkshire no where near as cheap. So Fairfax's starting point is much better.

2.) Fairfax earnings are spiking for all the reasons we have discussed on this board. This will drive the stock price higher.

3.) Active management is working right now. And Fairfax has been on a hot streak. The management team at Fairfax has been executing exceptionally well in recent years. 

 

That is not to suggest that there isn't a place for Berkshire in an investors portfolio. It is a well run, rock solid company. With a pretty good guy in charge.

[Munger_Disciple]

58 minutes ago, Viking said:

 

@Munger_Disciple I do not spend a great deal of time looking far into the past. It is interesting/fun to do. What I really care about is the future. My guess is Fairfax should easily outperform Berkshire moving forward. And by a lot. There are a couple of reasons for this:

1.) Fairfax is way underpriced - probably 30% or more. Berkshire no where near as cheap. So Fairfax's starting point is much better.

2.) Fairfax earnings are spiking for all the reasons we have discussed on this board. This will drive the stock price higher.

3.) Active management is working right now. And Fairfax has been on a hot streak. The management team at Fairfax has been executing exceptionally well in recent years. 

 

That is not to suggest that there isn't a place for Berkshire in an investors portfolio. It is a well run, rock solid company. With a pretty good guy in charge.

 

 I agree with you that FFH will likely do better than BRK (mainly because it is cheaper) from this starting point over the next 5 years with the following caveats: (1) FFH insurance underwriting results produce a decent combined ratio (I would take 98% but I know you think it will be 95%), and they don't get their head handed to them in the case of a catastrophic event (2) the Fed doesn't cut rates too much which it would in the case of a rough recession.  

Edited July 6, 2023 by Munger_Disciple

[TwoCitiesCapital]

13 minutes ago, Munger_Disciple said:

 

 I agree with you that FFH will likely do better than BRK from this starting point over the next 5 years with the following caveats: (1) FFH insurance underwriting results produce a decent combined ratio (I would take 98% but I know you think it will be 95%), and they don't get their head handed to them in the case of a catastrophic event (2) the Fed doesn't cut rates too much which it would in the case of a rough recession.  

 

I'm actually thinking the recessionary scenario is better for Fairfax than status quo now that they're locking in duration. 

 

Having $1B+ per year in stable interest income and/or billions on capital gains from Treasuries in a rate cur scenario gives them plenty to work with in the case of credit dislocation. This will be especially true if they start pairing down the TRS position prior to any recession taking away a potential liquidity drain from a dropping share price. 

 

Credit spreads haven't budged yet, but the pace of bankruptcies in the US is currently at levels that have previously seen 8-10% HY spreads (currently at ~5). If the Fed keeps hiking, I'd expect the pain will become more acute and we could see absolute mayhem in corporate spreads - IG and HY. That environment would give Fairfax the potential to reinvest gains/income at significantly higher rates than the 4-6% currently available to them

[Munger_Disciple]

20 minutes ago, TwoCitiesCapital said:

 

I'm actually thinking the recessionary scenario is better for Fairfax than status quo now that they're locking in duration. 

 

Having $1B+ per year in stable interest income and/or billions on capital gains from Treasuries in a rate cur scenario gives them plenty to work with in the case of credit dislocation. This will be especially true if they start pairing down the TRS position prior to any recession taking away a potential liquidity drain from a dropping share price. 

 

Credit spreads haven't budged yet, but the pace of bankruptcies in the US is currently at levels that have previously seen 8-10% HY spreads (currently at ~5). If the Fed keeps hiking, I'd expect the pain will become more acute and we could see absolute mayhem in corporate spreads - IG and HY. That environment would give Fairfax the potential to reinvest gains/income at significantly higher rates than the 4-6% currently available to them

 

Yeah that's a good point. 

[jbwent63]

On 7/4/2023 at 5:46 PM, gfp said:

 

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.

Thank you for the helpful response, unlike another just before yours....

[Intelligent_Investor]

Treasury yields are popping, 30 year bond now at a 4 handle, this could be very good for FFH

Edited July 6, 2023 by Intelligent_Investor

[gfp]

24 minutes ago, Intelligent_Investor said:

Treasury yields are popping, 30 year bond now at a 4 handle, this could be very good for FFH

 

Well they didn't bite the last four times it happened in the past 8 months.

[glider3834]

https://www.businesswire.com/news/home/20230706093283/en/AM-Best-Upgrades-Credit-Ratings-of-Odyssey-Group-Holdings-Inc.’s-Members

[nwoodman]

2 hours ago, glider3834 said:

https://www.businesswire.com/news/home/20230706093283/en/AM-Best-Upgrades-Credit-Ratings-of-Odyssey-Group-Holdings-Inc.’s-Members

Positively gushing, thanks for the link

 

“The rating upgrades recognize the removal of ratings drag from Odyssey Group’s parent company, Fairfax Financial Holdings Limited (Fairfax), which has demonstrated sustained improvement in its overall credit profile in recent years. Fairfax has reduced its debt leverage materially and improved its overall operating performance, while maintaining consistently sound balance sheet strength and financial flexibility. As a result, debt servicing metrics have improved sustainably, reducing the burden imposed on Fairfax subsidiaries and supporting the removal of ratings drag on Odyssey Group.”

 

Can take or leave ratings agencies a the best of times but this is well deserved .  Fairfax with a strong balance sheet who woulda thunk.

[Viking]

6 hours ago, glider3834 said:

https://www.businesswire.com/news/home/20230706093283/en/AM-Best-Upgrades-Credit-Ratings-of-Odyssey-Group-Holdings-Inc.’s-Members

@glider3834 thanks for sharing. Great to see the ratings agencies recognizing the significant improvements being made under the hood at Fairfax and its largest subsidiary. Its funny because it looks to me like AM Best might be further along in this regard than the equity analysts; probably because they are more specialized? 
 

Who is AM Best? 
 

AM Best is the largest credit agency in the world specializing in the insurance industry. It is the gold standard for insurance companies (please correct me if i am wrong).
 

What did we learn from this news release?

 

The financial strength rating of Odyssey has been upgraded to A+ (Superior). This is the same rating that AM Best currently has for both WR Berkley and Markel. As far as AM Best is concerned, Fairfax’s largest insurance subsidiary, Odyssey, belongs in that group.

 

Why the upgrade? 

• balance sheet strength, which AM Best assesses as strongest
• strong operating performance
• favorable business profile
• appropriate enterprise risk management

I am not an insurance expert. AM Best is. For those board members who are worried about ‘reserving’ or ‘risk management’, at least at Odyssey, things look very good. 

 

We also learn a little about Fairfax in the news release:
 

“The rating upgrades recognize the removal of ratings drag from Odyssey Group’s parent company, Fairfax Financial Holdings Limited (Fairfax), which has demonstrated sustained improvement in its overall credit profile in recent years. Fairfax has reduced its debt leverage materially and improved its overall operating performance, while maintaining consistently sound balance sheet strength and financial flexibility. As a result, debt servicing metrics have improved sustainably, reducing the burden imposed on Fairfax subsidiaries and supporting the removal of ratings drag on Odyssey Group.”

 

We also learn a little more about Odyssey in the news release:

Odyssey has been slowly building out is specialty insurance business (the business everyone is trying to grow because it is higher margin and has more of a moat) in the US and this positive development gets a shout-out from AM Best.

 

“Odyssey Group otherwise continues to produce consistently strong underwriting results, despite elevated global catastrophe losses and is well-positioned to take advantage of continued rate improvement in many of its key business lines. Odyssey Group’s risk-adjusted capitalization remains strongly supportive of its strongest overall balance sheet strength assessment, and the group continues to benefit from its position as a global reinsurer with a well-diversified portfolio that also includes a significant position in the specialty primary market in the United States.”

Edited July 7, 2023 by Viking

[Maverick47]

The balance sheet management for Fairfax has been impressive, compared to almost any other insurer not named Berkshire.  With interest rates rising, many other competitors saw the market value of their bond portfolios fall, in many cases reducing their policyholder surplus/shareholder equity year over year for 2022 over 2021, at the exact same time that inflation in loss costs was requiring dramatic rate increases.  
 

For competitors that were writing (in 2021) almost as much premium as their surplus could support, 2022 was a rude wake-up call.  All else being equal, to keep the same level of claims paying ability/AM Best rating in 2022 that they had in 2021 simply while writing the same customers (no growth in policy count) would require an increase in surplus roughly equivalent to the double digit rate increases many of them filed for in 2022.  

 

Since their surplus often dropped year over year at the exact time that they would have desired it to increase, they face some difficult management choices — they can limit their appetite for new business until surplus valuations recover, raise equity or debt, or watch their ratings possibly be put on watch with negative outlooks.  Fairfax is in exactly the opposite position (as is Berkshire, and, I believe, Markel).  

 

Reminds me of former Citigroup CEO chuck Prince’s famous quote before the 2008 mortgage disaster:  “As long as the music plays you have to keep on dancing.  We’re still dancing”.  With their refusal to reach for yield on their bonds, Fairfax is now reaping the benefits of taking the long term view for the health of their business over the long run.

 

 Now Fairfax can dance while most of their competitors have had to take a seat.

Edited July 7, 2023 by Maverick47
Readability and add name of Citigroup CEO.

[Thrifty3000]

23 hours ago, glider3834 said:

https://www.businesswire.com/news/home/20230706093283/en/AM-Best-Upgrades-Credit-Ratings-of-Odyssey-Group-Holdings-Inc.’s-Members

Great news.

 

My understanding is if a reinsurer fails to pay claims then the primary insurer is still on the hook for the liabilities. (That’s why insurers disclose gross premiums and net premiums.) 

Therefore the reinsured premiums involve a certain amount of credit/counterparty risk (which should correlate with the reinsurer’s credit ratings). That’s why higher credit ratings are an important competitive advantage for reinsurers. I’m sure the A+ rating increase will drive additional pricing power.

[Tommm50]

20 hours ago, Thrifty3000 said:

Great news.

 

My understanding is if a reinsurer fails to pay claims then the primary insurer is still on the hook for the liabilities. (That’s why insurers disclose gross premiums and net premiums.) 

Therefore the reinsured premiums involve a certain amount of credit/counterparty risk (which should correlate with the reinsurer’s credit ratings). That’s why higher credit ratings are an important competitive advantage for reinsurers. I’m sure the A+ rating increase will drive additional pricing power.

 

That's correct. The back end purchase of reinsurance does not alter the insurance company's obligation to the policy holder.

[racemize]

Saw this on twitter—any insurance insiders have any comments?

 

 

[Parsad]

1 hour ago, racemize said:

Saw this on twitter—any insurance insiders have any comments?

 

 

 

Dino has no idea what he's talking about.  Knows little actually about underwriting or what type of policies FFH is underwriting.  17 years of 100% or better CR isn't an indication if they are pricing premiums appropriately?! 

 

If FFH doesn't write good business, how did they know that other insurers were writing shit business on several occasions in the last 35 years?  You don't write crappy business while calling out your competitors underwriting.  They've also run surpluses on claims for a couple of decades...that isn't an indicator of appropriate pricing or risk management?

 

Go back and read the annual reports...which I bet Dino has not done!  Cheers!

[glider3834]

full disclosure guys thats me dino was replying to

cheers

 

[nwoodman]

Not an insurance insider, but the issue I have with this sort of "industry gossip" is that it is never specific. What long tail lines are they actually talking about?  Riverstone? Are they  pre/post Andy Barnard?   At least give us a hint or STFU.  If anything it sounds like a view that is about 13 years out of date.

 

When they picked up Allied World, Rivett actually named Med Mal as a potential issue but that those policies were all written prior to Fairfax's involvement

 

https://www.canadianunderwriter.ca/insurance/how-fairfaxs-allied-world-acquisition-is-working-out-1004163093/

 

If the perception that there is an insurance "sword of Damoclese" hanging over the company I hope it persists for  another few years and they retire 15-20% of shares outstanding in the meantime.

 

If they are talking about Riverstone then there may well be some skeletons but from my perspective the run-off business is idling

 

From the 2023 AR

"RiverStone, our run-off operation, ....... The industry continues to be challenging, especially in the United States with the plaintiff bar, armed with third-party litigation funding, continuing an aggressive push to create new mass torts. We continue to see development on asbestos claims as well as recent emerging claims such as molestation and opioids. Given

the nature of these claims, the results can be lumpy, with significant uncertainty around the eventual exposures and potential outcomes. RiverStone has been kept very busy focusing on our own latent claims and has not entered into any traditional third-party run-off acquisitions over the last number of years other than some small, very successful captive insurance deals. "

 

What is a runoff operation?

In insurance, a runoff operation refers to the process of managing a block of policies that a company has decided to stop writing or renewing. Essentially, the insurer continues to service the policies in the block (by paying claims, for example) until they expire, are cancelled, or all potential claim obligations have been settled.

During the runoff period, the insurer does not write new business or renew existing policies in that block. The decision to put a block of business into runoff might be due to various strategic reasons, such as a change in the company's risk appetite, a decision to exit a particular market, or a response to regulatory changes or shifts in the business environment.

 

[MMM20]

4 hours ago, nwoodman said:

If the perception that there is an insurance "sword of Damoclese" hanging over the company I hope it persists for  another few years and they retire 15-20% of shares outstanding in the meantime.

 

Exactly. And could be higher with the sorts of cash flows they've lined up and the auction buyback playbook.