Fairfax 2023

[Viking]

Kennedy Wilson is a misunderstood and underappreciated part of Fairfax’s investment portfolio. Most investors think of Kennedy Wilson through the lens of an equity holding. Looking at the performance of KW’s stock price the past 5 years… what a dog! Woof! KW shares were trading around $21.40 five years ago and today they closed at $16.44/share.

 

What a terrible investment by Fairfax. Right? Wrong.  

 

Kennedy Wilson has been one of Fairfax’s best investments. What is wrong with the analysis above? It completely misses the point of WHY Fairfax is invested in Kennedy Wilson – it is to tap into Kennedy Wilson’s extensive global real estate expertise.  

 

First, let’s do a quick review. 

 

Fairfax began its relationship with Kennedy Wilson in 2010. A very successful real estate investment partnership has recently blossomed to now include a significant real estate debt platform. Over the past 3 years, Kennedy Wilson has become a much more important part of Fairfax’s investment portfolio. The partnership now includes both equity and fixed income investments:

• 2010: $100 million direct investment in Kennedy Wilson stock
• 2010: Real estate investment partnerships
• 2020: Real estate debt platform
• 2022: $300 million debenture (4.75%)
  • 7-year warrants for 13 million common shares with strike price of $23. 
• 2023: Purchase of $2.3 billion in real estate loans from PacWest
• 2023: $200 million debenture (6%)
  • 7-year warrants for 12.3 million common shares with strike price of $16.21 

Roughly, how much does Fairfax currently earn annually from its different investments with Kennedy Wilson? 

 

My very rough estimate is around $481 million. Fairfax has about $5.7 billion invested with Kennedy Wilson so this represents about a 8.4% annual rate of return for Fairfax (mostly interest and dividends).
 

Of this total, about $429 million is interest and dividends. The PacWest loan transaction just closed so the incremental earnings from this investment will start to show in the interest and dividend income bucket starting in Q3. 

 

 

The expansion of the relationship with Kennedy Wilson provides another good example of how Fairfax over the last 5 years has been:

• Leveraging and expanding existing, successful, long-term partnerships
• Methodically diversifying their investment portfolio - in this case into real estate

The result is yet another new, growing, significant and steady stream of earnings for Fairfax.

—————

What is the timeline of Fairfax’s various investments in/with Kennedy Wilson?

 

Started in 2010

• Kennedy Wilson (KW) stock
  • initial equity investment was US$100 million (9% of company)
  • today position is worth $200 million (13.3 million shares x $14.98/share)
  • current annual dividend of $0.96 = 6.4% yield = $12.8 million in dividend income per year
  • Wade Burton is on the board (along with Stanley Zax, who sold Zenith to Fairfax in 2010)
• investment partnership:
  • started with $278 million in 2010
  • Prem’s 2022 letter: “we have invested $1.2 billion alongside with them in real estate, have received cash proceeds of $1.1 billion and still have real estate worth about $570 million. Our average annual realized return on completed projects is approximately 22%.”

Expanded in 2020

• Launched a real estate debt platform: to pursue first mortgage loans secured by high-quality real estate in the Western U.S., Ireland and the U.K.
  • 2020 = initial amount of $2 billion
  • 2022 = increased to $5 billion
  • Prem’s 2022 letter: “$2.4 billion invested through Kennedy Wilson in well-secured first mortgages, primarily on high quality residential apartment buildings, at a floating rate (currently 7.9%)” = $190 million in interest income.

Expanded further in 2022

• 2022: KW perpetual preferred equity investment = $300 million
  • pays an annual dividend of 4.75% = $14.25 million
  • includes 7-Year warrants for 13 million shares at strike price of $23/share.

Expanded further in 2023

• PacWest debt purchase of $2.3 billion: KW is buying loans at a discount for $2.1 billion, of which Fairfax is buying $2 billion (95%). Fairfax is also assuming $1.7 billion in future funding obligations. 
  • Average loan to value is 51%.
  • More than 70% of the loans relate to multifamily or student residences; the remainder are a mix of industrial, hotel and life sciences office property projects. 
  • Fairfax expects the average annual return to exceed 10%.
  • Remaining term to maturity is 1.7 years, with some loans carrying extension rights (max 2 years).
• 2023: KW perpetual preferred equity investment = $200 million
  • pays an annual dividend of 6% = $12 million
  • includes 7-Year warrants for 12.3 million shares at strike price of $16.21/share.

Ownership of stock:

• Kennedy Wilson has 139.4 million shares outstanding
• Fairfax owns 13.3 million = 9.5%
• Fairfax also owns warrants:
  • 13 million at $23
  • 12.3 million at $16.21
• If Fairfax exercises all warrants it would own 38.6 million shares = 23.4% (164.7 total)

Fairfax is getting paid 4.75% and 6% while waiting for the warrants to get in the money (they have seven years). 

 

What does Fairfax see in Kennedy Wilson?

 

Prem’s comment from the 2022 press release from Kennedy Wilson announcing the PacWest transaction: “We are pleased to make this new investment in Kennedy Wilson and to build on our outstanding partnership that dates back to 2010,” said Prem Watsa, Chairman and CEO of Fairfax. “We believe in their global business model, the strength of their high-quality, income-generating assets, and their best-in-class management team.”

• https://ir.kennedywilson.com
• Q4 2022 Investor Presentation: https://ir.kennedywilson.com/~/media/Files/K/Kennedy-Wilson-IR-V2/reports-and-presentations/presentations/q4-2022-investors-presentation.pdf

—————

Interesting trivia point: Bill McMorrow (CEO and Chairman of KW) was the genesis behind Fairfax's investment in Bank of Ireland in 2011. Fairfax made around $1 billion from that one investment. Thank you, Bill! (see Prem's comments below from 2011AR)

—————

2020: Kennedy Wilson and Fairfax Launch New $2 Billion Real Estate Debt Platform

• https://ir.kennedywilson.com/news-events-and-presentations/press-releases/2020/05-14-2020-105955816

“Kennedy Wilson and Fairfax first invested together in 2010 when the two companies acquired $250 million of real estate assets, including real estate secured loans and real property. Over the past decade, the companies have partnered on $7 billion in aggregate acquisitions, including over $3 billion of real estate related debt investments. In addition, Fairfax currently has an equity ownership interest in Kennedy Wilson of approximately 9%.”

 

2022: Kennedy Wilson Announces $300 Million Perpetual Preferred Equity Investment From Fairfax Financial

• https://ir.kennedywilson.com/news-events-and-presentations/press-releases/2022/02-23-2022-211613501

“Kennedy Wilson and Fairfax began their relationship in 2010 when Fairfax made a $100 million equity investment in Kennedy Wilson. Over the past decade, the companies have partnered on $8 billion in aggregate acquisitions, including approximately $5 billion of real estate related debt investments. Fairfax currently has an equity ownership interest in KW of approximately 9%.”

—————

2023: Fairfax Financial Partners With Kennedy Wilson to Acquire Loan Portfolio From Pacific Western Bank, Makes Additional Equity Investment in Kennedy Wilson

• https://www.fairfax.ca/press-releases/fairfax-financial-partners-with-kennedy-wilson-to-acquire-loan-portfolio-from-pacific-western-bank-makes-additional-equity-investment-in-kennedy-wilson-2023-06-05/

Kennedy Wilson’s Press Release

• https://ir.kennedywilson.com/news-events-and-presentations/press-releases/2023/06-09-2023-110020523

“The acquisition of this Loan Portfolio from Pacific Western Bank highlights Kennedy Wilson’s historic ability to find off-market transactions during periods of uncertainty, move with speed, and build on our successful track record of investing through all real estate cycles,” said William McMorrow, Chairman and CEO at Kennedy Wilson. “The foundations of Kennedy Wilson are our deep relationships, our reputation as a great partner, and our strength in being nimble when opportunity arises; all of which came into play with this loan portfolio acquisition.”

—————

2022AR Prem: “Since we met Bill McMorrow and Kennedy Wilson in 2010, we have invested $1.2 billion alongside with them in real estate, have received cash proceeds of $1.1 billion and still have real estate worth about $570 million. Our average annual realized return on completed projects is approximately 22%. We also own 10% of the company. More recently we have been investing with Kennedy Wilson in first mortgage loans secured by high quality real estate in the western United States, Ireland and the United Kingdom with a loan-to-value ratio of 60% on average. At the end of 2022, we had invested in $2.0 billion of mortgage loans in the U.S. at an average yield of 8.1% and an average maturity of 1.7 years, and in approximately $350 million of mortgage loans in the U.K. and Europe at an average yield of 6.0% and an average maturity of 2.5 years.”

 

“The combination of interest and dividends and profit from associates accounted for a 3.7% return on our portfolio in 2022, the highest return in the last five years (average 2.5%). We expect to earn these returns in 2023 as well, partly because we have $2.4 billion invested through Kennedy Wilson in well-secured first mortgages, primarily on high quality residential apartment buildings, at a floating rate (currently 7.9%).”

—————

2013AR: “The KWF LPs are partnerships formed between the company and Kennedy-Wilson, Inc. and its affiliates to invest in U.S. and international real estate properties. The company participates as a limited partner in the KWF LPs, with limited partnership interests ranging from 50% to 90%. Kennedy-Wilson holds the remaining limited partnership interests in each of the KWF LPs and is also the General Partner. For the KWF LPs where the company may exercise veto rights over one or more key activities, those partnerships are considered joint ventures under IFRS 11. Where the company has no veto rights over key activities, the company is considered to have significant influence under IAS 28. The equity method of accounting is applied to all of the KWF LPs.”

—————

2011AR Prem: “I have attended the Berkshire Hathaway shareholders’ meeting since there were only 200 shareholders in attendance about 30 years ago. I still find I learn something each year from Warren and Charlie. At the meeting in 2010, I met Bill McMorrow through Alan Parsow, who is a money manager based in Omaha and a great friend. Bill founded Kennedy Wilson, a real estate services and investment company, in 1988, and he now owns 26% of the company. As a result of this meeting, we invested $100 million in a Kennedy Wilson 6% preferred convertible at $12.41 per share, and later purchased $32.5 million of a 6.45% preferred convertible at $10.70 per share and 400,000 common shares at $10.70 per share. Fully diluted we own 18.5% of the company. In 2010 and 2011, we also invested $290 million in several real estate deals with Kennedy Wilson in California, Japan and the U.K. – deals at significant discounts to replacement cost and with excellent unlevered cash on cash returns, in which Kennedy Wilson is the managing partner and a minority investor. We are thrilled to be partners with Bill and his team, who always focus on the downside and have the expertise to manage these investments and finally harvest them. You never know what you will find at a Berkshire meeting!!”

 

“And there is more to the McMorrow story. While Bill was negotiating the purchase of some real estate loans from Bank of Ireland, he was really impressed with Ritchie Boucher, the Bank’s CEO. Bill introduced Ritchie to us, and we too were very impressed. With the help of our friends at Canadian Western Bank, one of the best banks in Canada, we thoroughly reviewed the opportunity and then quickly formed an investment group with Wilbur Ross, Mark Denning from Capital Research and Will Danoff at Fidelity, which purchased $1.6 billion of Bank of Ireland shares on a rights issue (Fairfax’s share was $387 million).”

Edited August 2, 2023 by Viking

[nwoodman]

2 hours ago, Viking said:

You never know what you will find at a Berkshire meeting!!”

 

“And there is more to the McMorrow story. While Bill was negotiating the purchase of some real estate loans from Bank of Ireland, he was really impressed with Ritchie Boucher, the Bank’s CEO. Bill introduced Ritchie to us, and we too were very impressed. With the help of our friends at Canadian Western Bank, one of the best banks in Canada, we thoroughly reviewed the opportunity and then quickly formed an investment group with Wilbur Ross, Mark Denning from Capital Research and Will Danoff at Fidelity, which purchased $1.6 billion of Bank of Ireland shares on a rights issue (Fairfax’s share was $387 million).”

 

I have been thinking a lot lately that one of the magic ingredients to these styles of companies is deal flow.  Berkshire was able to use their brand and capital to backstop companies during the GFC but the phone nary rang during Covid (I know the Fed backstopped before things got truly interesting).  Perhaps Fairfax's deal flow is lower quality, and they are less discerning than Berkshire or Markel. However, they always seem to have something on the go. Often to the point of more ideas than capital i.e over leveraged.  Even their misadventures have yielded silver linings, Greece being the prime example. Anyway, back to your thoughtful post, the more partners you have turning over rocks on your behalf, the better

[Parsad]

4 hours ago, Viking said:

Kennedy Wilson is a misunderstood and underappreciated part of Fairfax’s investment portfolio. Most investors think of Kennedy Wilson through the lens of an equity holding. Looking at the performance of KW’s stock price the past 5 years… what a dog! Woof! KW shares were trading around $21.40 five years ago and today they closed at $16.44/share.

 

What a terrible investment by Fairfax. Right? Wrong.  

 

Kennedy Wilson has been one of Fairfax’s best investments. What is wrong with the analysis above? It completely misses the point of WHY Fairfax is invested in Kennedy Wilson – it is to tap into Kennedy Wilson’s extensive global real estate expertise.  

 

First, let’s do a quick review. 

 

Fairfax began its relationship with Kennedy Wilson in 2010. A very successful real estate investment partnership has recently blossomed to now include a significant real estate debt platform. Over the past 3 years, Kennedy Wilson has become a much more important part of Fairfax’s investment portfolio. The partnership now includes both equity and fixed income investments:

• 2010: $100 million direct investment in Kennedy Wilson stock
• 2010: Real estate investment partnerships
• 2020: Real estate debt platform
• 2022: $300 million debenture (4.75%)
  • 7-year warrants for 13 million common shares with strike price of $23. 
• 2023: Purchase of $2.3 billion in real estate loans from PacWest
• 2023: $200 million debenture (6%)
  • 7-year warrants for 12.3 million common shares with strike price of $16.21 

Roughly, how much does Fairfax currently earn annually from its different investments with Kennedy Wilson? 

 

My very rough estimate is around $481 million. Fairfax has about $5.7 billion invested with Kennedy Wilson so this represents about a 8.4% annual rate of return for Fairfax (mostly interest and dividends).
 

Of this total, about $429 million is interest and dividends. The PacWest loan transaction just closed so the incremental earnings from this investment will start to show in the interest and dividend income bucket starting in Q3. 

 

 

The expansion of the relationship with Kennedy Wilson provides another good example of how Fairfax over the last 5 years has been:

• Leveraging and expanding existing, successful, long-term partnerships
• Methodically diversifying their investment portfolio - in this case into real estate

The result is yet another new, growing, significant and steady stream of earnings for Fairfax.

—————

What is the timeline of Fairfax’s various investments in/with Kennedy Wilson?

 

Started in 2010

• Kennedy Wilson (KW) stock
  • initial equity investment was US$100 million (9% of company)
  • today position is worth $200 million (13.3 million shares x $14.98/share)
  • current annual dividend of $0.96 = 6.4% yield = $12.8 million in dividend income per year
  • Wade Burton is on the board (along with Stanley Zax, who sold Zenith to Fairfax in 2010)
• investment partnership:
  • started with $278 million in 2010
  • Prem’s 2022 letter: “we have invested $1.2 billion alongside with them in real estate, have received cash proceeds of $1.1 billion and still have real estate worth about $570 million. Our average annual realized return on completed projects is approximately 22%.”

Expanded in 2020

• Launched a real estate debt platform: to pursue first mortgage loans secured by high-quality real estate in the Western U.S., Ireland and the U.K.
  • 2020 = initial amount of $2 billion
  • 2022 = increased to $5 billion
  • Prem’s 2022 letter: “$2.4 billion invested through Kennedy Wilson in well-secured first mortgages, primarily on high quality residential apartment buildings, at a floating rate (currently 7.9%)” = $190 million in interest income.

Expanded further in 2022

• 2022: KW perpetual preferred equity investment = $300 million
  • pays an annual dividend of 4.75% = $14.25 million
  • includes 7-Year warrants for 13 million shares at strike price of $23/share.

Expanded further in 2023

• PacWest debt purchase of $2.3 billion: KW is buying loans at a discount for $2.1 billion, of which Fairfax is buying $2 billion (95%). Fairfax is also assuming $1.7 billion in future funding obligations. 
  • Average loan to value is 51%.
  • More than 70% of the loans relate to multifamily or student residences; the remainder are a mix of industrial, hotel and life sciences office property projects. 
  • Fairfax expects the average annual return to exceed 10%.
  • Remaining term to maturity is 1.7 years, with some loans carrying extension rights (max 2 years).
• 2023: KW perpetual preferred equity investment = $200 million
  • pays an annual dividend of 6% = $12 million
  • includes 7-Year warrants for 12.3 million shares at strike price of $16.21/share.

Ownership of stock:

• Kennedy Wilson has 139.4 million shares outstanding
• Fairfax owns 13.3 million = 9.5%
• Fairfax also owns warrants:
  • 13 million at $23
  • 12.3 million at $16.21
• If Fairfax exercises all warrants it would own 38.6 million shares = 23.4% (164.7 total)

Fairfax is getting paid 4.75% and 6% while waiting for the warrants to get in the money (they have seven years). 

 

What does Fairfax see in Kennedy Wilson?

 

Prem’s comment from the 2022 press release from Kennedy Wilson announcing the PacWest transaction: “We are pleased to make this new investment in Kennedy Wilson and to build on our outstanding partnership that dates back to 2010,” said Prem Watsa, Chairman and CEO of Fairfax. “We believe in their global business model, the strength of their high-quality, income-generating assets, and their best-in-class management team.”

• https://ir.kennedywilson.com
• Q4 2022 Investor Presentation: https://ir.kennedywilson.com/~/media/Files/K/Kennedy-Wilson-IR-V2/reports-and-presentations/presentations/q4-2022-investors-presentation.pdf

—————

Interesting trivia point: Bill McMorrow (CEO and Chairman of KW) was the genesis behind Fairfax's investment in Bank of Ireland in 2011. Fairfax made around $1 billion from that one investment. Thank you, Bill! (see Prem's comments below from 2011AR)

—————

2020: Kennedy Wilson and Fairfax Launch New $2 Billion Real Estate Debt Platform

• https://ir.kennedywilson.com/news-events-and-presentations/press-releases/2020/05-14-2020-105955816

“Kennedy Wilson and Fairfax first invested together in 2010 when the two companies acquired $250 million of real estate assets, including real estate secured loans and real property. Over the past decade, the companies have partnered on $7 billion in aggregate acquisitions, including over $3 billion of real estate related debt investments. In addition, Fairfax currently has an equity ownership interest in Kennedy Wilson of approximately 9%.”

 

2022: Kennedy Wilson Announces $300 Million Perpetual Preferred Equity Investment From Fairfax Financial

• https://ir.kennedywilson.com/news-events-and-presentations/press-releases/2022/02-23-2022-211613501

“Kennedy Wilson and Fairfax began their relationship in 2010 when Fairfax made a $100 million equity investment in Kennedy Wilson. Over the past decade, the companies have partnered on $8 billion in aggregate acquisitions, including approximately $5 billion of real estate related debt investments. Fairfax currently has an equity ownership interest in KW of approximately 9%.”

—————

2023: Fairfax Financial Partners With Kennedy Wilson to Acquire Loan Portfolio From Pacific Western Bank, Makes Additional Equity Investment in Kennedy Wilson

• https://www.fairfax.ca/press-releases/fairfax-financial-partners-with-kennedy-wilson-to-acquire-loan-portfolio-from-pacific-western-bank-makes-additional-equity-investment-in-kennedy-wilson-2023-06-05/

Kennedy Wilson’s Press Release

• https://ir.kennedywilson.com/news-events-and-presentations/press-releases/2023/06-09-2023-110020523

“The acquisition of this Loan Portfolio from Pacific Western Bank highlights Kennedy Wilson’s historic ability to find off-market transactions during periods of uncertainty, move with speed, and build on our successful track record of investing through all real estate cycles,” said William McMorrow, Chairman and CEO at Kennedy Wilson. “The foundations of Kennedy Wilson are our deep relationships, our reputation as a great partner, and our strength in being nimble when opportunity arises; all of which came into play with this loan portfolio acquisition.”

—————

2022AR Prem: “Since we met Bill McMorrow and Kennedy Wilson in 2010, we have invested $1.2 billion alongside with them in real estate, have received cash proceeds of $1.1 billion and still have real estate worth about $570 million. Our average annual realized return on completed projects is approximately 22%. We also own 10% of the company. More recently we have been investing with Kennedy Wilson in first mortgage loans secured by high quality real estate in the western United States, Ireland and the United Kingdom with a loan-to-value ratio of 60% on average. At the end of 2022, we had invested in $2.0 billion of mortgage loans in the U.S. at an average yield of 8.1% and an average maturity of 1.7 years, and in approximately $350 million of mortgage loans in the U.K. and Europe at an average yield of 6.0% and an average maturity of 2.5 years.”

 

“The combination of interest and dividends and profit from associates accounted for a 3.7% return on our portfolio in 2022, the highest return in the last five years (average 2.5%). We expect to earn these returns in 2023 as well, partly because we have $2.4 billion invested through Kennedy Wilson in well-secured first mortgages, primarily on high quality residential apartment buildings, at a floating rate (currently 7.9%).”

—————

2013AR: “The KWF LPs are partnerships formed between the company and Kennedy-Wilson, Inc. and its affiliates to invest in U.S. and international real estate properties. The company participates as a limited partner in the KWF LPs, with limited partnership interests ranging from 50% to 90%. Kennedy-Wilson holds the remaining limited partnership interests in each of the KWF LPs and is also the General Partner. For the KWF LPs where the company may exercise veto rights over one or more key activities, those partnerships are considered joint ventures under IFRS 11. Where the company has no veto rights over key activities, the company is considered to have significant influence under IAS 28. The equity method of accounting is applied to all of the KWF LPs.”

—————

2011AR Prem: “I have attended the Berkshire Hathaway shareholders’ meeting since there were only 200 shareholders in attendance about 30 years ago. I still find I learn something each year from Warren and Charlie. At the meeting in 2010, I met Bill McMorrow through Alan Parsow, who is a money manager based in Omaha and a great friend. Bill founded Kennedy Wilson, a real estate services and investment company, in 1988, and he now owns 26% of the company. As a result of this meeting, we invested $100 million in a Kennedy Wilson 6% preferred convertible at $12.41 per share, and later purchased $32.5 million of a 6.45% preferred convertible at $10.70 per share and 400,000 common shares at $10.70 per share. Fully diluted we own 18.5% of the company. In 2010 and 2011, we also invested $290 million in several real estate deals with Kennedy Wilson in California, Japan and the U.K. – deals at significant discounts to replacement cost and with excellent unlevered cash on cash returns, in which Kennedy Wilson is the managing partner and a minority investor. We are thrilled to be partners with Bill and his team, who always focus on the downside and have the expertise to manage these investments and finally harvest them. You never know what you will find at a Berkshire meeting!!”

 

“And there is more to the McMorrow story. While Bill was negotiating the purchase of some real estate loans from Bank of Ireland, he was really impressed with Ritchie Boucher, the Bank’s CEO. Bill introduced Ritchie to us, and we too were very impressed. With the help of our friends at Canadian Western Bank, one of the best banks in Canada, we thoroughly reviewed the opportunity and then quickly formed an investment group with Wilbur Ross, Mark Denning from Capital Research and Will Danoff at Fidelity, which purchased $1.6 billion of Bank of Ireland shares on a rights issue (Fairfax’s share was $387 million).”

 

Great review of KW Viking!  Cheers!

[steph]

thank you Viking for sharing all your work with us. Much appreciated. 

[Viking]

3 hours ago, nwoodman said:

 

I have been thinking a lot lately that one of the magic ingredients to these styles of companies is deal flow.  Berkshire was able to use their brand and capital to backstop companies during the GFC but the phone nary rang during Covid (I know the Fed backstopped before things got truly interesting).  Perhaps Fairfax's deal flow is lower quality, and they are less discerning than Berkshire or Markel. However, they always seem to have something on the go. Often to the point of more ideas than capital i.e over leveraged.  Even their misadventures have yielded silver linings, Greece being the prime example. Anyway, back to your thoughtful post, the more partners you have turning over rocks on your behalf, the better

@nwoodman great comment. But i would take it a step further. I think Fairfax has been winnowing the vast collection of contacts they have. I think they know today who the top performers are. And the top performers are the ones getting the cash. And this has been happening for a few years. How will we know? Future results… when they keep surprising to the upside. 

[Viking]

53 minutes ago, steph said:

thank you Viking for sharing all your work with us. Much appreciated. 

@steph you are welcome. I learn so much from other posters… and what i learn usually makes its way into my future posts. This is a great community. We are very lucky right now. I have been following Fairfax for about 20 years. Only 2 other times has the set up looked as favourable as it does today: 2003 (short attack) and 2006/07 (short attack when they were sitting on giant CDS position). We all need to thank the gods for how everything with Fairfax has played out over the past 33 months. It has been a crazy wonderful ride. And the stock still trades well under 6 x 2023E earnings. Nuts.

[nwoodman]

45 minutes ago, Viking said:

@nwoodman great comment. But i would take it a step further. I think Fairfax has been winnowing the vast collection of contacts they have. I think they know today who the top performers are. And the top performers are the ones getting the cash. And this has been happening for a few years. How will we know? Future results… when they keep surprising to the upside. 

Quite possibly,  as you say we are in the process of finding out.  One thing I have tried (unsuccessfully) to handicap is their network.  I think your view of the world is more pragmatic - it’s extensive and the compounders get the capital.  

A couple of questions to you and the board 

 

1. One that intrigues me is Foran Mining. How did that investment come about?  I guess I am interested to know if it was a brokered deal (third party) or part of their network.

 

2. Also has anyone prised the lid off the Exco position?  This appears to be a cash spewing black box when energy prices are favourable.

 

https://www.kirkland.com/-/media/publications/article/2019/11/new-york-law-journal-exco-bankruptcy-restructuring.pdf?rev=334e0f6d637e47039cf954208197a785&hash=1158DA38C7721AD4AFABFA24D5DD257B

 

Normally not an energy/commodities guy but these two investments look like they are already home runs with a lot of potential upside

Edited August 2, 2023 by nwoodman

[Matthew Lembo]

Viking, thank you for all of your thoughtful analysis. I truly appreciate it. 

 

Newbie question for you b/c I dont understand exactly how it is working, on your earning estimate below I believe #4 represents the new IFRS discounting of reserves. If so I thought that might have been a one time adjustment but the below projects this recurring albeit at a smaller amount into the future. Was wondering if that is to capture the delta b/w the old way of reserve accounting and the new IFRS mandated way of discounting or am i totally missing it. 

 

[Xerxes]

On 7/20/2023 at 12:16 PM, SafetyinNumbers said:

Thanks for sharing! I’m really grateful to Bill for having Charlie and I on the podcast. I’m really lucky to know both of them and call them friends. 
 

Please share any feedback. It’s always appreciated! 

hi

i had a chance to listen to it. Thanks for the podcast. 
 

I liked the explanation that the hedges were to protect the insurance entities in a negative real rate environment. Often time i think folks think Prem just woke up one day and said to himself “let s make a big macro bet, shall we?”
 

I like Charlie being so super pumped about it. And the fact that he sold Costco at +35 p/e to buy FFH. 

[benchmark]

3 minutes ago, Xerxes said:

 

I like Charlie being so super pumped about it. And the fact that he sold Costco at +35 p/e to buy FFH. 

when did this happen?

[Xerxes]

8 minutes ago, benchmark said:

when did this happen?

Not munger. One of the guest on the podcast whose name is Charlie 

[benchmark]

1 hour ago, Xerxes said:

Not munger. One of the guest on the podcast whose name is Charlie 

ah, ok  

[Viking]

2 hours ago, Maxwave28 said:

Viking, thank you for all of your thoughtful analysis. I truly appreciate it. 

 

Newbie question for you b/c I dont understand exactly how it is working, on your earning estimate below I believe #4 represents the new IFRS discounting of reserves. If so I thought that might have been a one time adjustment but the below projects this recurring albeit at a smaller amount into the future. Was wondering if that is to capture the delta b/w the old way of reserve accounting and the new IFRS mandated way of discounting or am i totally missing it. 

 

@Maxwave28 your understanding is correct. When i do my updates i use the old accounting logic as much as possible. And 4.) becomes a plug kind of number. We will learn more about IFRS 17 when Fairfax reports tomorrow. My expectation is it will impact 4.) 

 

My hope is, over time, we will slowly learn what drives 4.) and how much (like changes in interest rates). So we can make educated guesses in models. Right now i feel like i am flying a little blind. I am not concerned. 

[dartmonkey]

8 hours ago, Viking said:

@steph . And the stock still trades well under 6 x 2023E earnings. Nuts.

 

Yes, there is a recent thread on this forum about historic landmarks, but maybe one landmark that we are within spitting distance of touching is price to book, which is getting close to 1. Q1 common shareholders' equity $18,663.8m (USD), market cap $18.574 as I speak (using the FRFHF quote). We will have a new book value in a few days, and it will be much higher than $18.6b (any guesses?), so we will still be trading well beneath book value, but it's heading in that direction...

[SafetyinNumbers]

46 minutes ago, dartmonkey said:

 

Yes, there is a recent thread on this forum about historic landmarks, but maybe one landmark that we are within spitting distance of touching is price to book, which is getting close to 1. Q1 common shareholders' equity $18,663.8m (USD), market cap $18.574 as I speak (using the FRFHF quote). We will have a new book value in a few days, and it will be much higher than $18.6b (any guesses?), so we will still be trading well beneath book value, but it's heading in that direction...

My guess is the stock gaps up to book value or higher on Friday and then it spend some time backing and filling during hurricane season. 

 

My book value over/under for the quarter is US$850. If I had to bet, I would take the over. 

[cwericb]

Today both the Dow and TSX were down over 300 points.

Prime hurricane season is almost upon us.

Fairfax stock has been setting new highs for several days.

 

And yet today, Fairfax stock defies the market trend and hits another new high with a substantial 1.6% ($17.29) jump* and firmly plants itself much closer to $1,100 CDN than the $1,000 mark we had been celebrating.

 

Seems people are finally starting to take notice of Fairfax. Friday may be interesting.

 

*fair volume too

Edited August 2, 2023 by cwericb

[OCLMTL]

16 hours ago, Viking said:

@steph you are welcome. I learn so much from other posters… and what i learn usually makes its way into my future posts. This is a great community. We are very lucky right now. I have been following Fairfax for about 20 years. Only 2 other times has the set up looked as favourable as it does today: 2003 (short attack) and 2006/07 (short attack when they were sitting on giant CDS position). We all need to thank the gods for how everything with Fairfax has played out over the past 33 months. It has been a crazy wonderful ride. And the stock still trades well under 6 x 2023E earnings. Nuts.

HI Viking, 

 

my first ever post here after lurking for a long time. Thanks for the incredible contribution to this website, along with other board members.

 

To your point of things being so great for 33 months and, despite this, only trading at max 6x 2023 (and 2024-2025E) earnings is beyond my comprehension. It’s a silly % of the my portfolio as is and yet, I sometimes wonder if 100% is not the appropriate number. I’ve rarely come across such a dislocation of reality vs perception in a large cap, high quality company in my entire career. I’m trying to find FFH specific (real) risks and all I see are industry/weather/cat risks that could be major headwinds… I can totally see long/short funds piling into FFH and shorting a basket of P&Cs on the other side to make an incredibly profitable trade while staying “market neutral”. Let’s see what Thursday evening brings us…

[UK]

My best guess (and hope) it is because of the very good price performance of share price of FFH recently and in a last few years, but it is really hard to understand why it is still trading today at only 1 PBV and not at some 1.2 or 1.3 already. However you look, on absolute or on relative, it does not make sense.

[nwoodman]

10 minutes ago, UK said:

My best guess (and hope) it is because of the very good price performance of share price of FFH recently and in a last few years, but it is really hard to understand why it is still trading today at only 1 PBV and not at some 1.2 or 1.3 already. However you look, on absolute or on relative, it does not make sense.

Give it time, the "market" has been a bit slow to catch on.   Totally agree with an earlier post, more than happy for it to compound at double digits for the next decade and always trade at book.  Berkshire and Markel P/B's make my fingers itchy.

[Viking]

4 hours ago, OCLMTL said:

HI Viking, 

 

my first ever post here after lurking for a long time. Thanks for the incredible contribution to this website, along with other board members.

 

To your point of things being so great for 33 months and, despite this, only trading at max 6x 2023 (and 2024-2025E) earnings is beyond my comprehension. It’s a silly % of the my portfolio as is and yet, I sometimes wonder if 100% is not the appropriate number. I’ve rarely come across such a dislocation of reality vs perception in a large cap, high quality company in my entire career. I’m trying to find FFH specific (real) risks and all I see are industry/weather/cat risks that could be major headwinds… I can totally see long/short funds piling into FFH and shorting a basket of P&Cs on the other side to make an incredibly profitable trade while staying “market neutral”. Let’s see what Thursday evening brings us…

@OCLMTL welcome to the wild side (posting). Thanks for sharing your thoughts. I agree with you that the current valuation makes no sense… even with the big move in the share price. we are learning a few things:

1.) Fairfax shares got stupid cheap. So everyone’s starting/reference point is wrong. 

2.) The phenomenal growth in the insurance companies over the past decade spiked the earnings power of the company - but low interest rates and Fairfax’s strategy of going low duration hid this increase in earnings power for a couple of years.

3.) the execution by the team at Fairfax is still being grossly under appreciated. Especially what they did with their fixed income portfolio. The spike in earnings is happening. It is sustainable. But few understand or believe. 
4.) Investment professionals are still in denial. Its almost like a badge of honour in the industry to say ‘i haven’t followed Fairfax for the past five years’ and then they follow it up with ‘oh, and don’t invest in that company… its a mess.’ Meanwhile their clients portfolios underperform. Psychology is such an important part of investing. 
 

I was talking to a family member about Fairfax tonight (they are way up on their investment) and they asked me if it was time to sell and lock in crazy big gains? I said ‘forget how much you are up for a second. You own a well run company and it is trading at 5.5 x earnings and its future prospects are very good. What do you think you should do?’  They got a blinding glimpse of the obvious - they decided to stay invested. I probably should have told them to stop looking at the stock price every day… hard when it keeps hitting fresh all time highs.

[UK]

https://www.wsj.com/articles/insurers-are-facing-more-than-one-kind-of-inflation-bb925670?mod=hp_minor_pos19

 

This has been an inflated year for natural disasters in the U.S. The number of U.S. potential billion-dollar weather and climate disasters in 2023 through June has exceeded every year tracked by that point besides 2017, with 12 such events so far, according to the National Oceanic and Atmospheric Administration’s National Centers for Environmental Information. The average from 1980 to 2022, adjusting costs for inflation, was around eight annually.

 

https://www.wsj.com/articles/home-insurers-are-charging-more-and-insuring-less-9e948113

 

“We’re still seeing the industry having an underwriting loss this year continuing out to 2025,” said Dale Porfilio, chief insurance officer at industry body the Insurance Information Institute. The institute expects that “the cycle of continuing to take rates upward is going to continue for the next two years,” Porfilio said.

...

The escalating cost of catastrophes is reflected in a steep increase in premiums for the reinsurance coverage that home-insurance companies buy to pass on some of their risk. Depending on the state regulator, those higher premiums can feed directly through to the price charged to homeowners, Fox said. His firm’s data shows reinsurance premiums were up on average 33% for June 1 renewals, which includes many Florida carriers, and 50% for renewals at the start of this year. 

The question of whether reinsurance prices will keep rising, piling more pressure on home-insurance premiums, depends a lot on what happens in the second half of this year, according to Fox. “There’s a fork in the road ahead,” he said. “If we have another major hurricane or some medium-size hurricanes or a spate of wildfires…that [reinsurance] price will go up again.”

 

Edited August 3, 2023 by UK

[UK]

WSJ:  This has been an inflated year for natural disasters in the U.S. The number of U.S. potential billion-dollar weather and climate disasters in 2023 through June has exceeded every year tracked by that point besides 2017, with 12 such events so far, according to the National Oceanic and Atmospheric Administration’s National Centers for Environmental Information. The average from 1980 to 2022, adjusting costs for inflation, was around eight annually.

 

FFH: The consolidated combined ratio of the property and casualty insurance and reinsurance operations was 93.9%, producing an underwriting profit of $337.5 million, compared to a combined ratio of 94.1% and an underwriting profit of $301.7 million in 2022, driven by continued growth in business volumes (net insurance revenue increased by 6.2%), prudent expense management and decreased catastrophe losses of $134.8 million or 2.4 combined ratio points in the quarter.

[Parsad]

11 minutes ago, Haryana said:

 

Brett Horn strikes again!

 

https://www.morningstar.com/stocks/xtse/ffh/quote

 

Fairfax Financial Earnings: Strong Underwriting Margins Partially Offset by Investment Losses

 

Senior Equity Analyst | Brett Horn | Aug 4, 2023

Fairfax Financial reported a solid second quarter with relatively strong underwriting margins. However, this was partially offset by some investment losses. While the second quarter was weaker than the first quarter, Fairfax is having a good year so far, with book value per share up 11% since year-end, adjusted for dividends. We will maintain our CAD 790 fair value estimate for the no-moat company and see the shares as overvalued at the moment.

 

 

It's because of guys like this that make the markets so efficient!  Cheers!

[Daphne]

Horn likely still belongs to the old shorting club. Still trying to recoup his losses.

[Parsad]

Every time any investment goes up, people should just start using the phrase, "Horned it!"

 

Watsa "horned it" this quarter!  Buffett "horned it" this quarter!  Zuckerberg "horned it" this quarter!  

 

Man, I just "horned it" with my FFH the last two years!

 

Cheers!