Thrifty3000 Posted August 24, 2023 Posted August 24, 2023 By gum, I think I'm starting to see eye to eye with @Viking on this argument that FFH is selling for around 5X normal earnings - and not 5X temporary hard-market-induced inflated earnings! Here is what the current investment portfolio would look like with very conservative ROI estimates for each asset class (ie. 1% ROI on cash instead of today's 5%). Notice that even with conservative ROI estimates the contribution per share would be $116.
Thrifty3000 Posted August 24, 2023 Posted August 24, 2023 Now, if we fast forward to 2027, and project a scenario where the hard market has cooled and short term interest rates have moderated, we could easily be looking at something more like this (I simply increased each asset class by a total of 15% to account for 3 years of conservative growth, and I reduced the share count a bit)... 4 years from now, after the cliff of locked in near term interest rates has past us by, the portfolio will still be able to produce $140+ per share without needing to do anything spectacular from an investment standpoint! You can add, say, $10 to $50 per share for insurance underwriting profits and we really are looking at the normalized 20% returns @Viking has been proclaiming. And, again, the all star investment team barely has to show up to work to produce the kinds of returns I'm forecasting. These estimates are probably too conservative.
treasurehunt Posted August 25, 2023 Posted August 25, 2023 8 hours ago, Thrifty3000 said: Now, if we fast forward to 2027, and project a scenario where the hard market has cooled and short term interest rates have moderated, we could easily be looking at something more like this (I simply increased each asset class by a total of 15% to account for 3 years of conservative growth, and I reduced the share count a bit)... 4 years from now, after the cliff of locked in near term interest rates has past us by, the portfolio will still be able to produce $140+ per share without needing to do anything spectacular from an investment standpoint! You can add, say, $10 to $50 per share for insurance underwriting profits and we really are looking at the normalized 20% returns @Viking has been proclaiming. And, again, the all star investment team barely has to show up to work to produce the kinds of returns I'm forecasting. These estimates are probably too conservative. Nice analysis. Thanks. To calculate the final return to common shareholders, however, shouldn't you deduct interest expenses, corporate overhead, income taxes and non-controlling interests? After all that, your base case looks more like $100 EPS attributable to common.
Haryana Posted August 25, 2023 Posted August 25, 2023 23 minutes ago, treasurehunt said: Nice analysis. Thanks. To calculate the final return to common shareholders, however, shouldn't you deduct interest expenses, corporate overhead, income taxes and non-controlling interests? After all that, your base case looks more like $100 EPS attributable to common. Not Thrifty3000 here but let me take a shot at it for now and see if that hits or makes any sense to you or anyone present - Apparently that table is talking about only the investment portfolio. The expenses you mentioned are reasonably projected to be more than well covered by their underwriting operations and still have profits left over to be added on the bottom line. Income taxes would be significant but still the normalized earnings are surprisingly quite high with conservative assumption.
treasurehunt Posted August 25, 2023 Posted August 25, 2023 16 minutes ago, Haryana said: Not Thrifty3000 here but let me take a shot at it for now and see if that hits or makes any sense to you or anyone present - Apparently that table is talking about only the investment portfolio. The expenses you mentioned are reasonably projected to be more than well covered by their underwriting operations and still have profits left over to be added on the bottom line. Income taxes would be significant but still the normalized earnings are surprisingly quite high with conservative assumption. Fair enough. Thrifty3000 mentioned $10 to $50 in underwriting profits. I took the midpoint and added $30 to his base investment case to get about $170 in investment returns + underwriting profits. I think this will get whittled down to $100 after all expenses and taxes. But it may be that the investment base case and/or the underwriting profit estimate are on the conservative side.
Haryana Posted August 25, 2023 Posted August 25, 2023 Looking forward to Fairfax getting included in TSX60 index sometime in the next few years by replacing the Intact Financial. Just for some context and seeking to be corrected if wrong: TSX60 is expected to be comprised of the 60 largest Canadian companies. However, it is a bit more complicated than that. To allow for diversification and representation of different industries, companies with lower market caps are included if they represent a different industry that would otherwise be missed. Thus, Fairfax is excluded from the TSX60 even if it is about the 35th largest Canadian company by market cap. Market cap of Intact is about 25B, Fairfax should overtake that soon.
Parsad Posted August 25, 2023 Posted August 25, 2023 17 hours ago, UK said: Not to derail the thread, but since I recently tried to look at it: does M seems somehow a lower hurdle for you vs FFH, even at current prices? I may be very wrong on M, no strong opinion on it, but especially for a big and surer bet, I actually think it is the opposite, meaning why even bother with M, if FFH is still so cheap?* *initially was questioning something similar about META vs GOOG a year ago:) At today's prices, if I liquidate FFH, even with higher fair value prices for the insurance subs, I might get 1-1.2 times book after paying off the debt...at best! If I liquidated Macy's today, just the store in Herald Square alone is worth more than the entire company. So forget the retail brick and mortar business, forget the online Macy's business, forget Bloomingdales, forget BlueMercury. Just selling the real estate will pay off the debt and get me what the market value of the company is. Then if you look at it from a P/E basis...at current prices, I would get my money back from FFH in 8-10 years...whereas even with the lower earnings for this quarter as they liquidated 10% of their inventory, Macy's would give me my money back in 4-5 years. I don't need Macy's to hit it out of the park. I just need Macy's to keep up with its peer group. If it can do that over the next couple of years, the market at some point will revalue it back up to around 10-12 times earnings. And if they manage to get a double, then it might get valued at 13-15 times earnings. And what's the worst that could happen to Macy's in the next few years? Another pandemic? Tougher competition? Reduced consumption? They've plowed through all of that before. I'm by no means saying people should sell Fairfax and buy Macy's. 25% of my portfolio is still Fairfax. But I'm certainly comfortable buying a chunk of Macy's based on P/E and liquidation value. I think it will return to fair value just like META did at some point. Cheers!
Viking Posted August 25, 2023 Posted August 25, 2023 (edited) The evolution of Fairfax - the multiple streams of high quality income phase Last week in my long-form post we learned that Fairfax’s operating earnings have spiked to a much higher base level. - https://thecobf.com/forum/topic/19861-fairfax-2023/page/45/#comment-528496 Let’s broaden the discussion out a little bit. Let’s look at all of Fairfax’s sources of income. What are they? What is their quality? How are they changing? Why does sources of income matter? ‘Quality earnings’: of all the sources of income, operating income are generally considered to be the highest quality for P&C insurance companies because the sources are considered to be predictable and durable. Companies that generate the majority of their total earnings from operating income are considered to be higher quality. As a result, the the stock prices of these companies usually trade at a premium valuation to peers. If we understand sources of income and their trend that should provide us with another important piece of information to help us understand a company’s valuation, especially when compared to peers. Fairfax has 5 streams of income: Underwriting profit Interest and dividend income Share of profit of associates (primarily Eurobank, Atlas, Exco, Stelco, GIG) Non-insurance subsidiaries (primarily Recipe, Fairfax India, Thomas Cook, AGT, Grivalia Hospitality, Dexterra) Net gains/losses on investments (mark to market equities, derivatives, fixed income, asset sales, including insurance) The first three streams when added together give us all important operating income. Let’s look at the average of these income streams over a 6-year period from 2016-2021 to see what we can learn: Size: From 2016-2021, Fairfax generated in total an average of about $2.5 billion per year from the 5 income streams listed above. The total amount was quite volatile year-to-year. Composition (split) of the average from 2016-2021: Net gains on investment was by far the largest income stream at 49% of the total. Interest and dividend income was the second largest bucket at 28%. Underwriting profit was the third largest largest at 12%. Share of profit of associates was 6%. Non-insurance subsidiaries was 4%. Operating income was a total of 46%, or less than half. These splits fit the narrative of the company at the time (2016-2021): The vast majority of income at Fairfax was being generated by ‘gains on investments’ and these gains had massive swings each year (up and down) so Fairfax’s reported results were quite volatile year to year. Lots of volatility year to year = low quality earnings. From 2016-2021, Fairfax earned an average of $44/year. Book value averaged $474. Its stock traded around $500 during this time. Fairfax was valued at around 1.05 x BV and a PE of around 11.4. These multiples were well below peers. Important: net gains/losses on investments - in the chart above an average number was input for each year from 2016-2021. Large negative annual numbers mess up the ‘split’ calculations. Importantly for our analysis, using an average number allows us to get a 6 year average that is a good representation of the split of the various income streams. Let’s look at the income streams for 2022: We are going to look at 2022 on its own. 2022 was an anomalous year for global financial markets - we had the largest bear market in history in fixed income and, at the same time, a bear market in stocks. As a result, Fairfax had a $1.7 billion loss on investments in 2022. This was largely offset by a $1.2 billion gain from the sale of its pet insurance business (pre-tax). So the final loss on investments came in at only $514 million. Operating income spiked higher to $3.1 billion. This number on its own was now larger than the average of the total of all income sources from 2016-2021. In 2022, the impact of rising interest rates has been fully reflected in Fairfax’s income statement and balance sheet. As a result, the fixed income portfolio/balance sheet has been largely de-risked from the impact of spiking interest rates. At the same time, a significant shift in the composition of Fairfax’s income streams that started in 2021 accelerated in 2022 - each of the 3 components of operating income all increased to record levels in 2022. Despite bear markets in both bond and stock markets, Fairfax was still able to deliver a total of $2.6 billion from its 5 income streams. Let’s look at my estimates for the earnings streams for 2023-2025: This is where things get really interesting. Especially when compared to 2016-2021. Size: From 2023-2025, my estimate has Fairfax generating an average of $5.9 billion per year from the 5 income streams. This is an increase of 139% over the run rate of $2.5 billion from 2016-2021. Composition (split) 2023-2025 compared to composition from 2016-2021: Interest income is now the largest single item at 36% up from 28%. Underwriting profit is up nicely to 21% from 12%. The big mover, though, is share of profit of associates which increased from 6 to 20%. Operating earnings are now 77% of the total. That is a massive increase from 46% from 2016-2021. Gains on investments are still a solid 20%. My estimate for this bucket of income is likely far too low - this is the one of the big reasons why I think my total earnings estimate for 2023-2025 will be proven to be too low. Non-insurance subsidiaries could grow significantly in the coming years. I think income of $400 million/year from this bucket (collection of companies) is attainable looking out a couple of years. Were this to occur, Fairfax would have a meaningful 5th income stream. Conclusion: Two stories are playing out simultaneously at Fairfax right now: a total earnings story - earnings are spiking. a quality of earnings story - the quality of earnings has improved dramatically in recent years Importantly, the increases in both the size and quality of earnings is sustainable. Having multiple sources of income does a couple of things for the company: provides important diversification across both insurance and investments. makes the whole company more resilient to both insurance and economic cycles. generates much more consistent cash flows over time allowing the company to be highly opportunistic with capital allocation. This should make Fairfax a more valuable company. It should trade today at a valuation multiple more in line with peers (if not a premium to some). What is reflected in Fairfax’s valuation? Investors have been warming to the Fairfax story. The stock price has increased 145% over the past 31 months (since Dec 31, 2020). However, Fairfax currently trades at a 5.2 x multiple to my 2023 estimated earnings. It is also trading at about 1 x book value. These are very low multiples and much below peers. This suggest to me that: Mr. Market is starting to understand the spiking earnings story at Fairfax. Mr Market does not yet understanding the much improved quality of earnings story at Fairfax. And that is because multiple expansion has not yet happened at Fairfax. Mr Market does get things right over the medium term. My guess is as investors come to more fully understand ‘new Fairfax’ we will get multiple expansion in the coming years and Fairfax will trade at a multiple closer to peers. If this happens it would (along with continued growth in earnings and share buybacks) help power the price of the stock to much higher levels. The hard market in insurance There is a lot of hand wringing among investors today about the status of the hard market in insurance. When will it end? What will it mean for insurers? Do we get a sideways insurance market (not too hot or too cold)? Or do we a rapid descent into insurance hell - and a full-on soft market. Underwriting profit makes up about 50% of total income for most insurers (with investments making up the other half - mostly from fixed income). So what happens to insurance pricing in the future will impact the financial results of most insurance companies in a significant way. For Fairfax, as we have just learned above, underwriting profit only makes up about 20% of total income from expected sources. As a result, where insurance pricing goes in the future will impact Fairfax far less than its insurance peers. Fairfax’s total earnings are now of a size, diversity and quality that maintaining strong underwriting profitability (perhaps mid-90’s CR) can be even more of the focus moving forward at the insurance operations. Unlike other insurance companies, Fairfax’s future will not be tied primarily to the insurance cycle. Its future will be tied to how well it does capital allocation. Capital allocation is increasingly becoming Fairfax’s competitive advantage. The insurance business model used by Fairfax: Fairfax uses the float of the insurance companies to buy non-insurance companies. These companies generate earnings. These earnings allow Fairfax to buy more insurance companies which increases float. This increase in float allows Fairfax to buy more non-insurance companies. Rinse and repeat… As we have seen above, Fairfax is now generating a record amount of income from its 5 income streams. At the same times, the quality of income has never been better. As i stated in my post last week, through the flywheel effect, Fairfax has now achieved ‘breakthrough’. My current estimate is Fairfax will generate a total of about $11.3 billion in net earnings (attributable to Fairfax shareholders) - mostly from high quality sources - over the next 3 years. Fairfax has never been better positioned as a company than it is today. Fairfax has been trying to get to this exact place for 38 years. It has finally arrived. What we are witnessing in real time is the beginning of the next phase of Fairfax’s evolution as a company. It is reminiscent of a much younger Berkshire Hathaway. (Of course, Fairfax’s business model is uniquely its own.) Edited August 25, 2023 by Viking
UK Posted August 25, 2023 Posted August 25, 2023 (edited) 1 hour ago, Parsad said: At today's prices, if I liquidate FFH, even with higher fair value prices for the insurance subs, I might get 1-1.2 times book after paying off the debt...at best! If I liquidated Macy's today, just the store in Herald Square alone is worth more than the entire company. So forget the retail brick and mortar business, forget the online Macy's business, forget Bloomingdales, forget BlueMercury. Just selling the real estate will pay off the debt and get me what the market value of the company is. Then if you look at it from a P/E basis...at current prices, I would get my money back from FFH in 8-10 years...whereas even with the lower earnings for this quarter as they liquidated 10% of their inventory, Macy's would give me my money back in 4-5 years. I don't need Macy's to hit it out of the park. I just need Macy's to keep up with its peer group. If it can do that over the next couple of years, the market at some point will revalue it back up to around 10-12 times earnings. And if they manage to get a double, then it might get valued at 13-15 times earnings. And what's the worst that could happen to Macy's in the next few years? Another pandemic? Tougher competition? Reduced consumption? They've plowed through all of that before. I'm by no means saying people should sell Fairfax and buy Macy's. 25% of my portfolio is still Fairfax. But I'm certainly comfortable buying a chunk of Macy's based on P/E and liquidation value. I think it will return to fair value just like META did at some point. Cheers! Thank you for the answer! I will try to read and think about this more. But a. FFH is trading more like at 5-6 PE vs M at 4-5 next year earnings and I think that visibility of normalized earnings into next 2-3 years is much better at FFH? So isn't this valuation difference much smaller? b. to what could happen, well I do not anticipate this, but if there is a big recession or spending slowdown in the next 2-3 years, retail business could suffer (at least short term and btw M has more than 2x EBITDA net debt), while insurance (at least in terms of demand etc) would still be fine? And then, if you look at these two in terms of buy and forget, it is not even close? Meaning insurance as a business will hardly face any disruptions, here it is also operated by owner etc, while M is kinda the opposite, no? Edited August 25, 2023 by UK
Viking Posted August 25, 2023 Posted August 25, 2023 (edited) 1 hour ago, Parsad said: At today's prices, if I liquidate FFH, even with higher fair value prices for the insurance subs, I might get 1-1.2 times book after paying off the debt...at best! If I liquidated Macy's today, just the store in Herald Square alone is worth more than the entire company. So forget the retail brick and mortar business, forget the online Macy's business, forget Bloomingdales, forget BlueMercury. Just selling the real estate will pay off the debt and get me what the market value of the company is. Then if you look at it from a P/E basis...at current prices, I would get my money back from FFH in 8-10 years...whereas even with the lower earnings for this quarter as they liquidated 10% of their inventory, Macy's would give me my money back in 4-5 years. I don't need Macy's to hit it out of the park. I just need Macy's to keep up with its peer group. If it can do that over the next couple of years, the market at some point will revalue it back up to around 10-12 times earnings. And if they manage to get a double, then it might get valued at 13-15 times earnings. And what's the worst that could happen to Macy's in the next few years? Another pandemic? Tougher competition? Reduced consumption? They've plowed through all of that before. I'm by no means saying people should sell Fairfax and buy Macy's. 25% of my portfolio is still Fairfax. But I'm certainly comfortable buying a chunk of Macy's based on P/E and liquidation value. I think it will return to fair value just like META did at some point. Cheers! Here is some constructive feedback: 1.) my guess is Fairfax earns $160/share in 2023. That is a 5.2 PE. I expect earnings per share to grow in 2024 and 2025. So Macy’s is not cheaper today. 2.) liquidation value. My guess is if Fairfax started to sell off its many assets it would realize significant value for shareholders. Of course that isn’t going to happen so it is kind of a useless exercise. My question: is Macy’s going to liquidate parts of the company? 3.) management: the management team at Fairfax has been executing exceptionally well the past 5 years (best in class among insurance companies). They are going to be getting in the range of another $11.3 billion in net earnings over the next 3 years. I have no idea how good the management team at Macy’s is… but are they that good? 4.) insurance is in a hard market. Retail is… in a terrible market that might get worse ( although i did buy a little Aritzia recently). Sanjeev, my read is you are significantly underestimating the current earnings power of Fairfax - like many of the posters on this board. And i love it. Stocks usually climb the wall of worry. PS: i will admit i do not follow Macy’s… but i will do some reading on the weekend. Your banging of the table is what got me back into Fairfax in late 2020. And more recently you nailed META. Edited August 25, 2023 by Viking
Candyman1 Posted August 25, 2023 Posted August 25, 2023 Rumors of a take over bid on BB. Not sure how to think about it ... it seems after all the trials and tribulation with BB it would be nice to get money for BB and have it off the plate of FFH. On the other hand they seem to be making progress. Deep down, I think I would rather get rid of it. In the end it is now fairly small percentage of FFH.
Parsad Posted August 25, 2023 Posted August 25, 2023 9 hours ago, Viking said: Here is some constructive feedback: 1.) my guess is Fairfax earns $160/share in 2023. That is a 5.2 PE. I expect earnings per share to grow in 2024 and 2025. So Macy’s is not cheaper today. 2.) liquidation value. My guess is if Fairfax started to sell off its many assets it would realize significant value for shareholders. Of course that isn’t going to happen so it is kind of a useless exercise. My question: is Macy’s going to liquidate parts of the company? 3.) management: the management team at Fairfax has been executing exceptionally well the past 5 years (best in class among insurance companies). They are going to be getting in the range of another $11.3 billion in net earnings over the next 3 years. I have no idea how good the management team at Macy’s is… but are they that good? 4.) insurance is in a hard market. Retail is… in a terrible market that might get worse ( although i did buy a little Aritzia recently). Sanjeev, my read is you are significantly underestimating the current earnings power of Fairfax - like many of the posters on this board. And i love it. Stocks usually climb the wall of worry. PS: i will admit i do not follow Macy’s… but i will do some reading on the weekend. Your banging of the table is what got me back into Fairfax in late 2020. And more recently you nailed META. 10 hours ago, UK said: Thank you for the answer! I will try to read and think about this more. But a. FFH is trading more like at 5-6 PE vs M at 4-5 next year earnings and I think that visibility of normalized earnings into next 2-3 years is much better at FFH? So isn't this valuation difference much smaller? b. to what could happen, well I do not anticipate this, but if there is a big recession or spending slowdown in the next 2-3 years, retail business could suffer (at least short term and btw M has more than 2x EBITDA net debt), while insurance (at least in terms of demand etc) would still be fine? And then, if you look at these two in terms of buy and forget, it is not even close? Meaning insurance as a business will hardly face any disruptions, here it is also operated by owner etc, while M is kinda the opposite, no? Macy's could experience a recessionary environment, but so will the entire retail industry. The question is why is Macy's priced at a lower valuation to its peers...not dissimilarly to why FFH is priced lower to its peers? For some reason, the market thinks both Macy's and FFH will disproportionately be impacted by any industry losses, so Macy's is dumped in with lower tier retailers and FFH is dumped in partly with general reinsurers. Yet neither business deserves to belong there. Like FFH is currently doing, Macy's has generated steady free cash for years, unlike many retail competitors. Macy's also owns a quality real estate portfolio. Again like Fairfax, Macy's has been through many different types of environments and continues to generate cash. So even in the best case scenario, you've both assumed that Macy's isn't priced any more cheaply than Fairfax...yet we would all agree that as Macy's goes down and Fairfax goes up, the margin of safety moves in favor of Macy's. Like I said, I own a ton of Fairfax, and I like its long-term prospects. But I find Macy's more and more attractive as the price falls further. The one thing I promised myself years ago, is never fall in love with a stock...fall in love with the fundamentals and the margin of safety it provides. If something is cheap and something is stupid cheap...I'm going to always fall into that stupid cheap category! Cheers!
Haryana Posted August 25, 2023 Posted August 25, 2023 Some people will never buy individual stocks because any significant allocation to move the needle would be too risky. Some other people will never buy a broad equity index fund because it is too passively dumb and they can do it better. I see Fairfax as a good balance, somewhere in between an individual stock and an index fund for the following reasons: 1. Global diversification over uncorrelated industries 2. Decentralization as a key that unlocks the gift of diversification 3. Leverage that allows equity like returns with high-grade-bonds like risk profile
SafetyinNumbers Posted August 25, 2023 Posted August 25, 2023 1 hour ago, Haryana said: Some people will never buy individual stocks because any significant allocation to move the needle would be too risky. Some other people will never buy a broad equity index fund because it is too passively dumb and they can do it better. I see Fairfax as a good balance, somewhere in between an individual stock and an index fund for the following reasons: 1. Global diversification over uncorrelated industries 2. Decentralization as a key that unlocks the gift of diversification 3. Leverage that allows equity like returns with high-grade-bonds like risk profile My ETF substitute is E-L Financial. Basically a global quality equity portfolio plus some $VOO for greater than a 50% discount to liquidation (which would take about a week).
Thrifty3000 Posted August 26, 2023 Posted August 26, 2023 (edited) On 8/24/2023 at 10:36 PM, Haryana said: Not Thrifty3000 here but let me take a shot at it for now and see if that hits or makes any sense to you or anyone present - Apparently that table is talking about only the investment portfolio. The expenses you mentioned are reasonably projected to be more than well covered by their underwriting operations and still have profits left over to be added on the bottom line. Income taxes would be significant but still the normalized earnings are surprisingly quite high with conservative assumption. Yes. You and @treasurehunt are thinking about this correctly. The investment portfolio earnings are pre-interest, taxes, overhead, runoff… And it’s just the earning from the portfolio, so it doesn’t include earnings from underwriting or from “miracles” pulled out of a hat like the billion dollar pet insurance companies or Digit going public. The purpose was to show how powerful the investment portfolio is on a per-share basis even under a hyper-conservative, dare I say, pessimistic ROI scenario. Keep in mind, the 2027 table I provided assumed what would be the second lowest investment returns (on a five year rolling basis) in the company’s nearly 40 year history! Second only to the brief period where they hedged their entire equity portfolio! (Oops) It defies logic to project such a pessimistic future given Fairfax has the strongest investment team, the strongest global network and the strongest portfolio in its history. Every 1% increase in the portfolio’s ROI increases per share earnings by $30! My 2027 table projects 4.68% ROI. I think Fairfax’s investment team assumes the portfolio will earn 7% long term (please correct me if I’m wrong). Since inception the portfolio has averaged 7.7% ROI. A 7% portfolio return equates to over $200 per share in 2027!! And, yes, you would still have to add up to $50 of underwriting earnings and then deduct taxes and overhead, etc. This is not the time to give Fairfax a no confidence vote on future prospects. The stock price should be at least 50% higher. And, it will be soon enough. I won’t be surprised if the stock price hits $2,400 USD within 5 years. Edited August 26, 2023 by Thrifty3000
MMM20 Posted August 26, 2023 Posted August 26, 2023 (edited) https://www.wsj.com/finance/insurance-catastrophe-reinsurance-hurricane-77a69eab The industry needs to be talking about the plausibility of $200 billion nominal loss years, which might be more of a near-term possibility than we realize,” says Steve Bowen, chief science officer at brokerage Arthur J. Gallagher & Co.’s Gallagher Re. The net result, says catastrophe-modeling veteran Karen Clark, is that the industry is facing a turning point akin to Andrew’s wake. And she would know: Back in 1992, Clark faxed around an estimate for Andrew’s loss based on a computer model she had developed that was twice what other industry sources at the time were saying. Her number proved to be the right one. Insurers’ struggle today to price what she calls “frequency peril” risks like wildfires are “a déjà vu moment,” Clark says. “I never thought I would see a disrupted market like after Andrew. But here we are.” Part of the challenge has been insurers or their clients relying on models like those developed in the 1990s for hurricanes or earthquakes to understand other kinds of risks, including secondary perils like wildfires or “social” risks like litigation. There has also been a glut of capital in the insurance industry, which has helped depress risk pricing. Superlow interest rates led investors to seek out yield in strange places, like “cat” bonds and other insurance-linked securities that paid high rates but bore the risk of catastrophe losses. Reinsurers globally failed to earn back their cost of capital in five of the six years from 2017 to 2022, according to estimates by S&P Global Ratings. Now, things are changing. Rising interest rates are making it less attractive for investors to pour money into insurance risks when they can get higher yields on simpler things. That has given the upper hand to big reinsurers, which have pushed through big price increases this year. Reinsurers are also often changing the structures of their coverage by raising the so-called attachment points at which they will start to absorb losses, enabling them to focus on the more extreme, existential risks to insurers’ capital. Also aided by the prospect of higher interest rates on their investment portfolios, reinsurers such as Everest Group, RenaissanceRe, Munich Re and Swiss Re have seen their shares rally sharply in the past year. But with rising attachment points, primary insurers—firms like Allstate or Progressive, which sell policies to consumers or businesses and often buy reinsurance to cover their tail risks—can end up more exposed to these frequent-but-smaller catastrophes. One way they can compensate is to continue to raise the premiums they charge their customers. Another is to pull back from the trickiest markets, like when State Farm said it would stop writing new homeowners’ policies in California. Clark says insurers will need to adapt to newer kinds of models that help price risks like thunderstorms or wildfires. Her firm is updating its wildfire model as often as once a year. So whether a big one hits or not, this hurricane season is going to be an important measuring stick for insurers. A quiet season or two could actually make things more volatile for the industry if a sense of complacency sets in and pricing momentum slows. As the underwriting adage goes, there is no such thing as a bad risk; only a bad price. Edited August 26, 2023 by MMM20 1
Viking Posted August 27, 2023 Posted August 27, 2023 (edited) Fairfax’s $56.5 Billion Investment Portfolio: What Will It Earn in 2023 to 2025? Fairfax has two income sources that drive earnings and growth in book value: underwriting and investments. Given their business model (use insurance/float to invest in non-insurance companies) about 20% of their income comes from underwriting and 80% of their income comes from investments. Given its outsized importance to Fairfax, let’s dig into Fairfax’s investment portfolio and try and determine what sort of return it will be able to generate moving forward. This will give us great insight into what Fairfax will earn. And this will enable us to better understand Fairfax’s current valuation. How big is Fairfax’s investment portfolio? It is about $56.5 billion or $2,435/share. Has it been growing in size? Yes. From 2018 to 2022 it increased: in absolute terms by 9.4% per year. per share by 13.5% per year. What is the split today? Fixed income = $40 billion (71%) Equities/derivatives = $16.5 billion (29%) What did Fairfax earn on its total investment portfolio in the past? Prem provided this information in his letter in the 2022AR (attached at the bottom of this post): From 1986-2010, Fairfax earned an average of 9.7% on its investment portfolio. For the first 25 years of its existence, Fairfax’s secret sauce was its return on its total investment portfolio. In aggregate it was very good. From 2011-2016, Fairfax earned an average of 2.3% From 2017-2022, Fairfax earned an average of 4.8% 2010-2020 was a lost decade for Fairfax shareholders. The issue was not the insurance side of the business. The investment side of the company completely messed up (the equities/derivatives part). The big mistake was the equity hedge/short position. There were also lots of poor equity purchases from 2014-2017. Let’s focus on the last 5 years. What Fairfax did 10 years ago is interesting. What they did the past 5 years is much more helpful in understanding the current situation. (Please note, I am not sure of the exact build that Prem used to get to the averages that he put in his letter in the 2022AR. My build is outlined below. There will be differences. However, directionally, the comparisons should still be useful.) From 2018-2022, Fairfax earned an average of 5.1% from their investments (my build is detailed below). Let’s overlay what happened in financial markets over this same time period: historically low interest rates from 2018 to the middle 2022 - this killed returns in the fixed income portfolio for much of the 5 year period. 3 different bear markets in stocks: 2018, 2020 and 2022. historic bear market in bonds in 2022. Given the significant headwinds in financial markets from 2018-2022, the fact that Fairfax was able to deliver a total return of 5.1% each year (on average) is actually pretty impressive. What happened? Hamblin Watsa started to get their investing mojo back. Note: IFRS: I am ignoring for now ‘Effects of discounting and risk adjustment’ = about $480 million to June 30, 2023. What did the management team at Fairfax do from 2018-2022? Internal: Ended equity hedge/shorting strategy. The final short positions (closed out in late 2020) resulted in total losses of $624 million from 2018-2020, or an average of $208 million over each of the three years. The equity holdings from 2014-2017 have mostly been fixed. Beginning in 2022, and lead by Eurobank, these holdings have gone from being a headwind to earnings (losing hundreds of millions every year in total) to now being a tailwind (making hundreds of millions every year in total). That is likely an improvement (swing) of +$500 million per year (my numbers are very rough and intended to be directionally accurate). Since 2018, new equity investments have been very good. They are, in aggregate, performing very well. These holdings are a growing tailwind to earnings. Chug, chug, chug. External: Interest rates bottomed in late 2021: Fairfax sold $5.2 billion in corporate bonds (yielding 1%) and bought short term treasuries and reduced average duration to 1.2 years. Interest rates spiked in 2022 and into 2023: average duration has been extended to 2.4 years. I think they bought some Canadian corporate bonds in Q2, 2023... Covid bear market 2020: got exposure to 1.96 million Fairfax shares at $373/share. Bought back 2 million Fairfax shares in late 2021 at $500/share. Bear market 2022: spent billions buying more of companies it already owned often at bear market low prices. The investment team at Fairfax has been putting on a clinic on the benefits of active management over the past 3 years. The extreme volatility we have seen the past three years has actually been a big tailwind to Fairfax and its investment portfolio. This begs the question: would Fairfax perform better in a ‘safe’ environment or in a ‘shit storm’ environment? Over the medium term (3 year time horizon), i think they would actually do better in a ‘shit storm’ environment. Especially when you include the $3.7 billion in net earnings (much of it from high quality sources that could be reinvested opportunistically) that is likely to be rolling in each year moving forward. That would be ‘buy low’ on steroids. We are going to come back to this point later. But we are getting ahead of ourselves a little. How do things look in 2023? Both equities and fixed income are poised to deliver very good results moving forward - and the table is set for this to last for years into the future. This is the part that most investors still do not get. Why? The significant ‘internal’ drags that were holding down Fairfax’s returns from 2018-2022 are gone. And significant new tailwinds have emerged. Equities: No more losses from the equity hedge/short trade. The equity purchases from 2014-2017 are now delivering very good returns. The equity purchases from 2018 to date continue to performing well. Importantly, Fairfax boosted their stakes in many companies they already own at bear market low prices. This will be a tailwind for future earnings. Covid headwinds have flipped to tailwinds at Recipe, Thomas Cook and BIAL. Bottom line, the underlying earnings power of Fairfax’s $16.5 billion equity portfolio is finally fully delivering on its potential. It was already doing much better in 2022. All an investor had to do was look at share of profit of associates, which spiked to over $1 billion in 2022, to see the transformation of the companies captured in that bucket. But the improved performance in 2022 was masked by the general bear markets in bonds and stocks and the subsequent large unrealized investment losses that were reported. Fixed income: As good as the story is in equities, it is even better in fixed income. Going short duration of 1.2 years in late 2021 was, with hindsight, pure genius. Probably the best investment decision Fairfax has ever made in its history. Bond yields have since spiked higher. As a result, interest income has been spiking higher. It began picking up steam in 2022. But it has really got going in 2023. And 2024 is shaping up to be even better. And now Fairfax is extending duration. The big increases in the returns in both the equity and fixed income portfolios is now spiking the return on Fairfax’s $56.5 billion total investment portfolio. Most importantly, the increase in earnings we are seeing in the equity portfolio (to higher quality) and the bond portfolio (to longer duration) make these higher earnings durable. Ok. Enough talk. Show me the money! What is the current estimate of what Fairfax might earn on its total investment portfolio in 2023? My current estimate for Fairfax to generate an total investment return of about $4.5 billion in 2023, or a return of 8% on its total investment portfolio. Assumptions to get to $4.5 billion in 2023: We are already half way through the year in terms of reported results. And we are almost 2 months into Q3. So it is a pretty straight forward exercise to come up with reasonable estimates for the remainder of this year: Interest and dividend income was $465 million in Q2. My guess is the current run rate is over $500 million per quarter so $1.9 billion for the year looks about right. $40 billion fixed income portfolio: my estimate for average yield in 2023 is 4.5%. Share of profit of associates was $603 million in 1H. My estimate of $1.1 billion for FY is likely low. Consolidated equities was -$36 million in 1H. This should reverse in 2H, driven by Recipe, Thomas Cook, Fairfax India and other holdings, and finish the year at $50 million. Net gains on investments was $450 million in 1H. I am estimating this to finish the year at $900 million. Gain on sales = Ambridge closed in Q2 and the GIG revaluation is expected to happen in 2H. The assumptions above are hardly heroic. And they get us to an 8% return on the investment portfolio for 2023. What is the current estimate for 2024 and 2025? My forecast is for Fairfax to earn an average of 8% on its total investment portfolio in both 2024 and 2025. And I think this is a conservative number. Why? For all the reasons I outlined above: many of the tailwinds to the equity and fixed income portfolios that are just now fully flowing through to reported results and this improvement should continue into 2024, although at a slower pace. Significant net earnings rolling in: an estimated $3.7 billion per year (mostly high quality). A management team with proven best-in-class capital allocation skills. I am sandbagging my forecast for ‘net gains on investments’ for 2024 and 2025. I am going low with my estimate because, of course, i don’t know where they are going to come from. Today, the management team at Fairfax has so many good options: Buy Fairfax stock trading at 5.2PE (to estimated 2023 earnings) and 1 x BV (which is well below intrinsic value). Shift from treasuries to high quality corporate bonds that are now yielding 6% to 6.5%. Given the increase in rates further out on the curve, continue to extend duration of the fixed income portfolio. Lots of equities are trading at low valuations (the run up in the market averages YTD in 2023 was largely driven by the ‘magnificent 7). Bottom line, it would not surprise me if Fairfax delivers a return of better than 8% on total investments in each of 2024 and 2025. What if my estimate of 8% on average over the next 3 years is approximately right? An 8% return on investments equates to net earnings of about $160/share in 2023. ($160 in earnings also assumes a full year CR of 95). This level of earnings should grow nicely in the future. The stock is currently trading at $834. Book value is $834/share. An 8% average return on investments means the current share price is indeed crazy cheap - sorry to keep repeating this point… but it is what it is. So what is it investors are missing? The total earnings that Fairfax is currently delivering is so big that investors simply don’t believe it. Fairfax’s historical numbers and my estimates do not match up - not even close. It makes sense for most investors to believe that Fairfax’s numbers will revert back over time to their lower historical levels. Investors also don’t believe that the high earnings number, if it actually happens in 2023, is sustainable. So even if a big number happens in 2023, well, it will be a fluke. They say “That baby’s coming down!” Why does the number have to come down in 2024? You pick the reason: ‘Interest rates are coming way down.’ ‘An economic recession is coming.’ ‘A stock market correction in coming.’ 'In 2026 (you fill in the bad thing that has to happen).' The pushback from investors is driven mostly by either disbelief or macro concerns. Nothing to do with Fairfax and what the company is actually doing or based on the results that it is currently delivering. What is it Peter Lynch suggests that an investor should focus on when doing their research on a company? Facts and earnings. What about macro? He thinks investors who focus on macro are nuts. Here is the really interesting thing… even if all of those scary macro things happen… I think they might actually make Fairfax’s future performance even better. Heads I win. Tails you lose. I love that type of bet. ————— From Prem’s letter in the 2022AR: Edited August 27, 2023 by Viking
Daphne Posted August 27, 2023 Posted August 27, 2023 Viking, I believe you’re dead on with respect to macros (as well as everything else). Most recall that the driver behind the disastrous hedges was Prem’s macro call on the economy.
nwoodman Posted August 27, 2023 Posted August 27, 2023 (edited) 15 hours ago, Viking said: Fairfax’s $56.5 Billion Investment Portfolio: What Will It Earn in 2023 to 2025? Fairfax has two income sources that drive earnings and growth in book value: underwriting and investments. Given their business model (use insurance/float to invest in non-insurance companies) about 20% of their income comes from underwriting and 80% of their income comes from investments. Given its outsized importance to Fairfax, let’s dig into Fairfax’s investment portfolio and try and determine what sort of return it will be able to generate moving forward. This will give us great insight into what Fairfax will earn. And this will enable us to better understand Fairfax’s current valuation. How big is Fairfax’s investment portfolio? It is about $56.5 billion or $2,435/share. Has it been growing in size? Yes. From 2018 to 2022 it increased: in absolute terms by 9.4% per year. per share by 13.5% per year. What is the split today? Fixed income = $40 billion (71%) Equities/derivatives = $16.5 billion (29%) What did Fairfax earn on its total investment portfolio in the past? Prem provided this information in his letter in the 2022AR (attached at the bottom of this post): From 1986-2010, Fairfax earned an average of 9.7% on its investment portfolio. For the first 25 years of its existence, Fairfax’s secret sauce was its return on its total investment portfolio. In aggregate it was very good. From 2011-2016, Fairfax earned an average of 2.3% From 2017-2022, Fairfax earned an average of 4.8% 2010-2020 was a lost decade for Fairfax shareholders. The issue was not the insurance side of the business. The investment side of the company completely messed up (the equities/derivatives part). The big mistake was the equity hedge/short position. There were also lots of poor equity purchases from 2014-2017. Let’s focus on the last 5 years. What Fairfax did 10 years ago is interesting. What they did the past 5 years is much more helpful in understanding the current situation. (Please note, I am not sure of the exact build that Prem used to get to the averages that he put in his letter in the 2022AR. My build is outlined below. There will be differences. However, directionally, the comparisons should still be useful.) From 2018-2022, Fairfax earned an average of 5.1% from their investments (my build is detailed below). Let’s overlay what happened in financial markets over this same time period: historically low interest rates from 2018 to the middle 2022 - this killed returns in the fixed income portfolio for much of the 5 year period. 3 different bear markets in stocks: 2018, 2020 and 2022. historic bear market in bonds in 2022. Given the significant headwinds in financial markets from 2018-2022, the fact that Fairfax was able to deliver a total return of 5.1% each year (on average) is actually pretty impressive. What happened? Hamblin Watsa started to get their investing mojo back. Note: IFRS: I am ignoring for now ‘Effects of discounting and risk adjustment’ = about $480 million to June 30, 2023. What did the management team at Fairfax do from 2018-2022? Internal: Ended equity hedge/shorting strategy. The final short positions (closed out in late 2020) resulted in total losses of $624 million from 2018-2020, or an average of $208 million over each of the three years. The equity holdings from 2014-2017 have mostly been fixed. Beginning in 2022, and lead by Eurobank, these holdings have gone from being a headwind to earnings (losing hundreds of millions every year in total) to now being a tailwind (making hundreds of millions every year in total). That is likely an improvement (swing) of +$500 million per year (my numbers are very rough and intended to be directionally accurate). Since 2018, new equity investments have been very good. They are, in aggregate, performing very well. These holdings are a growing tailwind to earnings. Chug, chug, chug. External: Interest rates bottomed in late 2021: Fairfax sold $5.2 billion in corporate bonds (yielding 1%) and bought short term treasuries and reduced average duration to 1.2 years. Interest rates spiked in 2022 and into 2023: average duration has been extended to 2.4 years. I think they bought some Canadian corporate bonds in Q2, 2023... Covid bear market 2020: got exposure to 1.96 million Fairfax shares at $373/share. Bought back 2 million Fairfax shares in late 2021 at $500/share. Bear market 2022: spent billions buying more of companies it already owned often at bear market low prices. The investment team at Fairfax has been putting on a clinic on the benefits of active management over the past 3 years. The extreme volatility we have seen the past three years has actually been a big tailwind to Fairfax and its investment portfolio. This begs the question: would Fairfax perform better in a ‘safe’ environment or in a ‘shit storm’ environment? Over the medium term (3 year time horizon), i think they would actually do better in a ‘shit storm’ environment. Especially when you include the $3.7 billion in net earnings (much of it from high quality sources that could be reinvested opportunistically) that is likely to be rolling in each year moving forward. That would be ‘buy low’ on steroids. We are going to come back to this point later. But we are getting ahead of ourselves a little. How do things look in 2023? Both equities and fixed income are poised to deliver very good results moving forward - and the table is set for this to last for years into the future. This is the part that most investors still do not get. Why? The significant ‘internal’ drags that were holding down Fairfax’s returns from 2018-2022 are gone. And significant new tailwinds have emerged. Equities: No more losses from the equity hedge/short trade. The equity purchases from 2014-2017 are now delivering very good returns. The equity purchases from 2018 to date continue to performing well. Importantly, Fairfax boosted their stakes in many companies they already own at bear market low prices. This will be a tailwind for future earnings. Covid headwinds have flipped to tailwinds at Recipe, Thomas Cook and BIAL. Bottom line, the underlying earnings power of Fairfax’s $16.5 billion equity portfolio is finally fully delivering on its potential. It was already doing much better in 2022. All an investor had to do was look at share of profit of associates, which spiked to over $1 billion in 2022, to see the transformation of the companies captured in that bucket. But the improved performance in 2022 was masked by the general bear markets in bonds and stocks and the subsequent large unrealized investment losses that were reported. Fixed income: As good as the story is in equities, it is even better in fixed income. Going short duration of 1.2 years in late 2021 was, with hindsight, pure genius. Probably the best investment decision Fairfax has ever made in its history. Bond yields have since spiked higher. As a result, interest income has been spiking higher. It began picking up steam in 2022. But it has really got going in 2023. And 2024 is shaping up to be even better. And now Fairfax is extending duration. The big increases in the returns in both the equity and fixed income portfolios is now spiking the return on Fairfax’s $56.5 billion total investment portfolio. Most importantly, the increase in earnings we are seeing in the equity portfolio (to higher quality) and the bond portfolio (to longer duration) make these higher earnings durable. Ok. Enough talk. Show me the money! What is the current estimate of what Fairfax might earn on its total investment portfolio in 2023? My current estimate for Fairfax to generate an total investment return of about $4.5 billion in 2023, or a return of 8% on its total investment portfolio. Assumptions to get to $4.5 billion in 2023: We are already half way through the year in terms of reported results. And we are almost 2 months into Q3. So it is a pretty straight forward exercise to come up with reasonable estimates for the remainder of this year: Interest and dividend income was $465 million in Q2. My guess is the current run rate is over $500 million per quarter so $1.9 billion for the year looks about right. $40 billion fixed income portfolio: my estimate for average yield in 2023 is 4.5%. Share of profit of associates was $603 million in 1H. My estimate of $1.1 billion for FY is likely low. Consolidated equities was -$36 million in 1H. This should reverse in 2H, driven by Recipe, Thomas Cook, Fairfax India and other holdings, and finish the year at $50 million. Net gains on investments was $450 million in 1H. I am estimating this to finish the year at $900 million. Gain on sales = Ambridge closed in Q2 and the GIG revaluation is expected to happen in 2H. The assumptions above are hardly heroic. And they get us to an 8% return on the investment portfolio for 2023. What is the current estimate for 2024 and 2025? My forecast is for Fairfax to earn an average of 8% on its total investment portfolio in both 2024 and 2025. And I think this is a conservative number. Why? For all the reasons I outlined above: many of the tailwinds to the equity and fixed income portfolios that are just now fully flowing through to reported results and this improvement should continue into 2024, although at a slower pace. Significant net earnings rolling in: an estimated $3.7 billion per year (mostly high quality). A management team with proven best-in-class capital allocation skills. I am sandbagging my forecast for ‘net gains on investments’ for 2024 and 2025. I am going low with my estimate because, of course, i don’t know where they are going to come from. Today, the management team at Fairfax has so many good options: Buy Fairfax stock trading at 5.2PE (to estimated 2023 earnings) and 1 x BV. Shift from treasuries to high quality corporate bonds that are now yielding 6% to 6.5%. Given the increase in rates further out on the curve, continue to extend duration of the fixed income portfolio. Lots of equities are trading at very good valuations (the run up in the market averages YTD in 2023 was largely driven by the ‘magnificent 7). Bottom line, it would not surprise me to see Fairfax deliver a better than an 8% return on investments in 2024 and 2025. What if my estimate of 8% on average over the next 3 years is approximately right? An 8% return on investments equates to net earnings of about $160/share in 2023. ($160 in earnings also assumes a full year CR of 95). This level of earnings should grow nicely in the future. The stock is currently trading at $834. Book value is $834/share. An 8% average return on investments means the current share price is indeed crazy cheap - sorry to keep repeating this point… but it is what it is. So what is it investors are missing? The total earnings that Fairfax is currently delivering is so big that investors simply don’t believe it. Fairfax’s historical numbers and my estimates do not match up - not even close. It makes sense for most investors to believe that Fairfax’s numbers will revert back over time to their lower historical levels. Investors also don’t believe that the high earnings number, if it actually happens in 2023, is sustainable. So even if a big number happens in 2023, well, it will be a fluke. They say “That baby’s coming down!” Why does the number have to come down in 2024? You pick the reason: ‘Interest rates are coming way down.’ ‘An economic recession is coming.’ ‘A stock market correction in coming.’ 'In 2026 (you fill in the bad thing that has to happen).' The pushback from investors is driven mostly by either disbelief or macro concerns. Nothing to do with Fairfax and what the company is actually doing or based on the results that it is currently delivering. What is it Peter Lynch suggests that an investor should focus on when doing their research on a company? Facts and earnings. What about macro? He thinks investors who focus on macro are nuts. Here is the really interesting thing… even if all of those scary macro things happen… I think they might actually make Fairfax’s future performance even better. Heads I win. Tails you lose. I love that type of bet. ————— From Prem’s letter in the 2022AR: It seems strange to me that Fairfax groups bond returns and equity returns together to create an average return on “investments’. I think this actually does their investment framework a disservice. I am sure HWIC are acutely aware that the only returns that matter are real returns and that guides a lot of their investment positioning. Might be a fun job on a rainy day to back out inflation and to get their “real return on investments” which is likely more telling of their investment prowess. Their bond positioning this time around has been fantastic, some of the best in the business for my money. Capital allocation going forwards, is why/was the discount applied. A full re-rating will occur if they can demonstrate to the market that they are re-investing this windfall in quality assets. Edited August 27, 2023 by nwoodman
newtovalue Posted August 27, 2023 Posted August 27, 2023 hey Viking - great analysis as always! one thing to ask you - i think we could assume the value of the investments would grow from $57.5BB. Did you keep it flat to be conservative?
Viking Posted August 27, 2023 Posted August 27, 2023 (edited) 2 hours ago, newtovalue said: hey Viking - great analysis as always! one thing to ask you - i think we could assume the value of the investments would grow from $57.5BB. Did you keep it flat to be conservative? @newtovalue yes, my estimate for the investment portfolio is low and probably way low: 2023 = $56.5 billion 2024 = $57.5 billion 2025 = $58.5 billion When the GIG acquisition closes that will cause a material increase to the investment portfolio. Continued organic growth in insurance will help as well. And as earnings roll in each quarter and are reinvested (further growing insurance and non-insurance buckets). My estimates are pretty dynamic… constantly changing as we get new information. Some numbers will be high and others low. My goal is to get the direction and total reasonably close. So far most of my estimates have been too low and often by quite a bit. So i took things up a fair bit with my last set of revisions. We will know more when Fairfax reports Q3. Edited August 27, 2023 by Viking
Munger_Disciple Posted August 27, 2023 Posted August 27, 2023 (edited) Question on Prem's ownership for Fairfax experts on the board. I am not very familiar with SEDAR filings but I looked at the annual information filing for Fairfax for 2023. It states Prem "controls" 100% of multiple voting shares of 1,548,000 and 3.5% of subordinate voting shares which comes to an additional 794,000 shares (I got this from 2023 Proxy). So from this filing, he "controls" a total of 2,342,000 shares (economic interest). Question is what does this mean? Do Prem & his family own these shares outright or does Prem control some limited partnership in which he owns the GP/ control interest? In that case what exactly is Prem's economic interest in Fairfax? Thanks in advance. Edit: Here is the additional info in 2023 Proxy (I used to think EDGAR is bad but SEDAR is worse): Mr. Prem Watsa controls Sixty Two, which owns 50,620 of our subordinate voting shares and 1,548,000 of our multiple voting shares, and himself beneficially owns an additional 741,985, and exercises control or direction over an additional 2,100, of our subordinate voting shares. Edited August 27, 2023 by Munger_Disciple
Parsad Posted August 28, 2023 Posted August 28, 2023 41 minutes ago, Munger_Disciple said: Question on Prem's ownership for Fairfax experts on the board. I am not very familiar with SEDAR filings but I looked at the annual information filing for Fairfax for 2023. It states Prem "controls" 100% of multiple voting shares of 1,548,000 and 3.5% of subordinate voting shares which comes to an additional 794,000 shares (I got this from 2023 Proxy). So from this filing, he "controls" a total of 2,342,000 shares (economic interest). Question is what does this mean? Do Prem & his family own these shares outright or does Prem control some limited partnership in which he owns the GP/ control interest? In that case what exactly is Prem's economic interest in Fairfax? Thanks in advance. Edit: Here is the additional info in 2023 Proxy (I used to think EDGAR is bad but SEDAR is worse): Mr. Prem Watsa controls Sixty Two, which owns 50,620 of our subordinate voting shares and 1,548,000 of our multiple voting shares, and himself beneficially owns an additional 741,985, and exercises control or direction over an additional 2,100, of our subordinate voting shares. Yes, Sixty-Two Corporation was the holding company that Prem started with a few very close investors...not sure if Robbert Hartog (Prem's mentor) was part of Sixty-Two...but there were a handful of early investors that joined him. He controls it though. Robbert did put a considerable sum in...not sure if it was through Hamblin-Watsa...or through Sixty-Two...or directly when Prem acquired Markel (now Northbridge). I believe the story is in the 25th Anniversary Book. So the bulk of his ownership is through Sixty-Two, and the $150M worth of stock he personally bought in the midst of the pandemic makes up about half the subordinate shares he owns outside of Sixty-Two. His family members also own some shares...some relatives...a lot of the employees and managers at Fairfax...Francis Chou still owns all the stock he bought at $3...etc. Cheers!
Munger_Disciple Posted August 28, 2023 Posted August 28, 2023 (edited) 1 hour ago, Parsad said: Yes, Sixty-Two Corporation was the holding company that Prem started with a few very close investors...not sure if Robbert Hartog (Prem's mentor) was part of Sixty-Two...but there were a handful of early investors that joined him. He controls it though. Robbert did put a considerable sum in...not sure if it was through Hamblin-Watsa...or through Sixty-Two...or directly when Prem acquired Markel (now Northbridge). I believe the story is in the 25th Anniversary Book. So the bulk of his ownership is through Sixty-Two, and the $150M worth of stock he personally bought in the midst of the pandemic makes up about half the subordinate shares he owns outside of Sixty-Two. His family members also own some shares...some relatives...a lot of the employees and managers at Fairfax...Francis Chou still owns all the stock he bought at $3...etc. Cheers! Thanks @Parsad. Do you know what % of 62 does Prem own? Also what happens to multiple voting shares after Prem? Presumably whoever gains control of 62 which in turn controls Fairfax? Also is Hamblin Watsa completely owned by Fairfax? Edited August 28, 2023 by Munger_Disciple
Parsad Posted August 28, 2023 Posted August 28, 2023 1 hour ago, Munger_Disciple said: Thanks @Parsad. Do you know what % of 62 does Prem own? Also what happens to multiple voting shares after Prem? Presumably whoever gains control of 62 which in turn controls Fairfax? Also is Hamblin Watsa completely owned by Fairfax? Yes, Hamblin-Watsa is completely owned by Fairfax and their investment advisory arm for Fairfax's portfolio. I believe Prem and his wife Nalini control almost 70% of Sixty-Two...maybe more now. The Watsa Family will retain control over Sixty-Two and Fairfax long-term. Prem and Nalini aren't big on passing on large amounts of inherited wealth. I imagine, not unlike Buffett and his ownership of Berkshire, Nalini will probably pass most of the ownership of Fairfax to their foundation...The Sixty-Three Foundation through which they do their family donations. The Watsa children and probably Prem & Nalini's grand-children, alongside their advisory board, will be long-term stewards of The Sixty-Three Foundation and indirectly Fairfax. So the family culture will remain with Fairfax for many, many decades! Cheers!
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