Fairfax 2023

[John Hjorth]

On 8/28/2023 at 2:02 AM, Parsad said:

... I believe the story is in the 25th Anniversary Book. ...

 

Kicking in a tiny footnote here. This must be the first time I have been made aware of the existence of this book! - at least I think so!

 

Anyone here on CoBF being lucky enough to own a specimen?

 

Found this in the 2010 Letter [issued in 2011] mentioning the book :

 

Quote

... You can see why we are so grateful for this performance and deeply humbled, given all the challenges we faced over this time period. We particularly want to thank our long term shareholders who have supported and encouraged us throughout this extraordinary journey. We have published a small book, “The First 25 Years of Fairfax”, written by journalist Ron Graham, based on a series of interviews. We hope you enjoy reading our story – a copy will be given to all attendees at ours hareholders’ meeting on April 20, 2011. ...

 

Also, then found this!

 

- - - o 0 o - - -

 

Now this "must have" urge starts kicking in at me! 

[MMM20]

On 8/28/2023 at 4:05 PM, StevieV said:

 

It's a stretch to call this finding a way around the challenge of increasing insurance rates.  It is simply choosing to forego insurance.  "Instead" of buying insurance, the homeowner will pay for a rebuild out of pocket if something happens.  Those are typically the two options.

 

I think it's fair to call it a workaround, just not a scalable one. Few people are in a position to just set aside an extra ~$1.5mm (or even $500K or whatever) and essentially self-insure. That's the whole point of insurance! It just gets scary when people with zero savings can't or won't get coverage for whatever reason. If that piece grows, the whole system becomes a bit more fragile, and maybe it's a sign that rates are becoming a bit stretched.

 

Edited August 30, 2023 by MMM20

[TwoCitiesCapital]

12 hours ago, John Hjorth said:

 

Kicking in a tiny footnote here. This must be the first time I have been made aware of the existence of this book! - at least I think so!

 

Anyone here on CoBF being lucky enough to own a specimen?

 

 

 They gave them out at the annual meeting a several years back. If you didn't attend in person, I don't think you'd have known they were floating around. 

 

I don't attend every year, but was fortunate enough to have been there for this one so have a copy on my bookshelf. 

Edited August 29, 2023 by TwoCitiesCapital

[Munger_Disciple]

13 hours ago, Parsad said:

 

Thanks to Kyle Holmes for confirming from the 1992 FFH Letter that Prem owns 100% of Sixty-Two since buying out the minority shareholders in 1992.  For some reason, I thought he increased his stake to 70%+, but he bought control of the whole entity.  Cheers!

 

[Parsad]

Actually, here is the information Kyle put together from the 1992 Letter...it actually seems that the minority interest was bought by Fairfax in 1992 from the minority investors...not sure if the ownership is the same today...but Prem certainly has control of Sixty-Two.  Maybe others know.  Cheers!

 

Sanjeev,

 

I was reading the message board this morning so I figured I would pass the below/attached from an old annual letter over to you related to one of the threads for what it was worth:

 

In 1992 we simplified our corporate relationships significantly by the purchase of Hamblin Watsa Investment Counsel Ltd. (HWIC) as well as a 49.9% interest in The Sixty Two Investment Company Limited (Sixty Two), the controlling shareholder of Fairfax. As I was a shareholder in both these companies and recognized the potential conflict of interest was very high, I want to make sure you understand how and why we did these transactions and why they were fair (I hope you agree!).

 

---

 

The purchase of the 49.9% interest in Sixty Two was basically to provide liquidity to the original investors who backed me seven years ago, on terms attractive to Fairfax. Sixty Two’s only asset is shares of Fairfax and it has no liabilities. The shares of Sixty Two were valued on the basis of the market price of the Fairfax shares owned by it, less a liquidity discount of 15%. As disclosed in Note 9, in essence Fairfax issued approximately 680,000 shares to acquire indirect ownership of about 800,000 of its shares. The net result was that Fairfax effectively repurchased approximately 120,000 of its shares (with a market value of over $3.3 million at $28 per share) for no cost. Book value and earnings per share will be about 2% higher because of this purchase. Sixty Two will continue to be controlled by me as it has been in the past. This purchase also was approved by our Board of Directors, the majority of our minority shareholders and all the investors in Sixty Two. With the completion of these two transactions, Fairfax is much simplified in its relationships and perhaps more focused. Also, the purchase of the Sixty Two shares brings to an end (at least formally) the original partnership that refinanced Fairfax (then known as Markel Financial) in those early days in 1985. Looking back, these investors must have been special to have financed an almost bankrupt insurance holding company led by a chairman with no corporate experience at all. There may, after all, be some truth in the definition of an entrepreneur–‘‘Unreasonable conviction based on inadequate evidence’’! Even though this group will continue to be shareholders for some time, I want to take this opportunity to thank them for their invaluable support, without which Fairfax would not have existed.

 

To further add some more colour to the below, as I understand it, Fairfax still owns 49.995% of Sixty Two while Prem still owns the other 50.005% so on an economic basis Prem effectively owns 799,389 shares via his interest in Sixty Two (he also owns another 744,085 shares to take his total to 1,543,474 shares) but of course due to his control of Sixty Two and then in turn Fairfax he controls 100% of the votes related to these shares… additionally, he does not need to worry about any issues related to minority partners in Sixty Two as Fairfax is his minority partner which he obviously controls so it provides for a lot of certainty related to Prem’s protection of the culture/etc at Fairfax longer term as you well know!

 

Note 9 from the 1992 Annual Report

 

On November 5, 1992 the company issued 433,773 subordinate voting shares at $28 per share as partial consideration for the purchase of Hamblin Watsa Investment Counsel Ltd.

 

Also on November 5, 1992, the company issued 679,352 subordinate voting shares at $28 per share to indirectly purchase 49.995% of The Sixty Two Investment Company Limited which owns 1,548,000 multiple voting and 50,620 subordinate voting shares of Fairfax.  The company's indirect ownership of its own shares constitutes an effective reduction of shares outstanding by 799,230 and this effective reduction has been reflected in the fully diluted earnings per share calculation and the book value per share calculation.

 

 

 

From Fairfax’s 2023 MIC

 

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.

[Munger_Disciple]

So I understand  (from an economic interest) Prem owns 50% of 62 plus another 744K shares directly. But it also means that there are really only 1,548,000/2 = 774,000 multiple voting shares outstanding in the company but Prem gets to vote as if there are 1,548,000 multiple voting shares because of his control of 62. 

Edited August 30, 2023 by Munger_Disciple

[gfp]

10 minutes ago, Munger_Disciple said:

So I understand  (from an economic interest) Prem owns 50% of 62 plus another 744K shares directly. But it also means that there are really only 1,548,000/2 = 774,000 multiple voting shares outstanding in the company but Prem gets to vote as if there are 1,548,000 multiple voting shares because of his control of 62. 

It's probably where Sardar got the idea

[Parsad]

19 hours ago, John Hjorth said:

 

Kicking in a tiny footnote here. This must be the first time I have been made aware of the existence of this book! - at least I think so!

 

Anyone here on CoBF being lucky enough to own a specimen?

 

Found this in the 2010 Letter [issued in 2011] mentioning the book :

 

 

Also, then found this!

 

- - - o 0 o - - -

 

Now this "must have" urge starts kicking in at me! 

 

Yup, I have one sent to me and autographed by Prem!  Thanks PW!

 

I keep it with the original Markel and Fairfax annual reports I have...given to me by an analyst friend at Fairfax...his own personal collection over the years.  Thanks PI! 

 

Two of the nicest gifts I've ever gotten!  Cheers! 

[Munger_Disciple]

8 minutes ago, gfp said:

It's probably where Sardar got the idea

 

 Hopefully the Sardar analogy doesn't go too far at Fairfax. 

[Xerxes]

@Parsad

for the uninitiated, who is Kyle ? 

[Hoodlum]

UBS says Hurricane Idalia could cost insurers $9.36 bln.  I don’t know what Fairfax’s exposure to the Florida market would be. 
 

https://www.reuters.com/world/us/hurricane-idalia-could-cost-insurers-936-bln-ubs-2023-08-30/

[Parsad]

4 hours ago, Xerxes said:

@Parsad

for the uninitiated, who is Kyle ? 

 

Kyle is a fund manager and member of the COBF.  Cheers!

[Parsad]

1 hour ago, Hoodlum said:

UBS says Hurricane Idalia could cost insurers $9.36 bln.  I don’t know what Fairfax’s exposure to the Florida market would be. 
 

https://www.reuters.com/world/us/hurricane-idalia-could-cost-insurers-936-bln-ubs-2023-08-30/

 

Generally as a rule of thumb...Fairfax takes a 1-3% hit of any large catastrophe and Berkshire takes a 5-8% hit.  Idalia is easily manageable by both.  Cheers!

[Munger_Disciple]

18 hours ago, gfp said:

It's probably where Sardar got the idea

 

If Prem changes his last name to Big Watsa I think we are in trouble . 

[Munger_Disciple]

50 minutes ago, Parsad said:

 

Generally as a rule of thumb...Fairfax takes a 1-3% hit of any large catastrophe and Berkshire takes a 5-8% hit.  Idalia is easily manageable by both.  Cheers!

 

Yes but hurricane season just began so probably more losses are yet to come in 2023. 

[Crip1]

4 hours ago, Munger_Disciple said:

 

If Prem changes his last name to Big Watsa I think we are in trouble . 

 

[Thrifty3000]

On 8/27/2023 at 2:16 PM, Viking said:

 @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. 

@Viking FYI as of the end of the second quarter the portfolio value had already surpassed your estimate for next year. I think you'll probably have to bump those numbers up, especially - as you mentioned - with GIG. (And, the portfolio excludes the spare billion sitting at the holding company, which is earning another $50 mil annually these days.)

 

 

 

[glider3834]

On 8/31/2023 at 5:15 AM, Hoodlum said:

UBS says Hurricane Idalia could cost insurers $9.36 bln.  I don’t know what Fairfax’s exposure to the Florida market would be. 
 

https://www.reuters.com/world/us/hurricane-idalia-could-cost-insurers-936-bln-ubs-2023-08-30/

I think Idalia will be a test for Brit which has been de-risking its US prop cat exposure this year - remember half of Ian's cat loss came from Brit.

Also it appears Idalia will impact insurers more than reinsurers 

https://www.reinsurancene.ws/hurricane-idalia-expected-to-be-earnings-event-reinsurers-to-be-minimally-impacted-am-best/

[Thrifty3000]

10 hours ago, glider3834 said:

I think Idalia will be a test for Brit which has been de-risking its US prop cat exposure this year - remember half of Ian's cat loss came from Brit.

Also it appears Idalia will impact insurers more than reinsurers 

https://www.reinsurancene.ws/hurricane-idalia-expected-to-be-earnings-event-reinsurers-to-be-minimally-impacted-am-best/

$9 bil is a non-event compared to Ian last year. Reinsurers are not only getting much better pricing this year, but also they’re getting much more favorable terms in their contracts (attachment points, etc). So, whatever FFH ends up paying, maybe $90 mil, I’m sure they’ve been well compensated for it.

[UK]

Still not past the peak. I wonder if and by how much it effects the price of FFH in this period?

 

Edited September 2, 2023 by UK

[Thrifty3000]

Here's how FFH's price to book value compares to 30 of its largest publicly traded insurer peers. FFH is right around 1x while the average is north of 1.5x.

 

[Munger_Disciple]

13 minutes ago, Thrifty3000 said:

Here's how FFH's price to book value compares to 30 of its largest publicly traded insurer peers. FFH is right around 1x while the average is north of 1.5x.

 

 

 

This table is a little misleading as you are comparing insurers that use GAAP with others like FFH that use IFRS. 

Edited September 2, 2023 by Munger_Disciple

[Thrifty3000]

28 minutes ago, Munger_Disciple said:

 

This table is a little misleading as you are comparing insurers that use GAAP with others like FFH that use IFRS. 

Ah, good point.

[MMM20]

17 hours ago, Thrifty3000 said:

Ah, good point.

FFH still clearly in the bottom half though. Betting it touches top quartile over the next few years. 

[SoonParted]

Does anyone know, or know where I can find, any numbers on the sensitivity of FFH earnings to the CAD/USD exchange rate, or on the proportion of their earnings in CAD vs USD?  Do they hedge currency risk?