Fairfax 2023

[TwoCitiesCapital]

2 hours ago, buylowersellhigh said:

Do most American investors on the board own FFH.TO or FRFHF?  

 

Any guidance on whether a taxable account or tax deferred is better?  ADR fees, etc. 

 

TIA,

BLSH

 

I own both because some of my accounts don't allow me to trade in foreign currencies/exchanges. 

 

Can confirm it's not an ADR but rather a foreign stock that trades pink sheets (is why the ticker ends in F instead of Y). No difference in tax withholding or fees - just liquidity. 

[Munger_Disciple]

2 hours ago, buylowersellhigh said:

Do most American investors on the board own FFH.TO or FRFHF?  

 

Any guidance on whether a taxable account or tax deferred is better?  ADR fees, etc. 

 

TIA,

BLSH

 

It is a Canadian company whether you own FFH.TO or FRFHF over the counter. It is the same security. There is more liquidity on TSX. 

But for tax reasons (all other things being equal, and they never are), it is better to hold it in a US tax deferred account because Canadian company qualified dividends are not subject to Canadian tax withholding in a US tax deferred account but are subject to Canadian withholding tax if the security is held by US resident in a taxable account. 

Edited September 5, 2023 by Munger_Disciple

[buylowersellhigh]

Thanks everyone for the information.  Much appreciated.

[newtovalue]

Not apples to apples - but Intact just bought a UK insurance company at 1x annual premiums (with a 96 percent combined ratio)

 

If we apply that multiple to FFH - we get a market cap of $27 billion usd or approximately $1600 cad a share.

 

Fairfax is cheap no matter how you cut it 

 

 

[SafetyinNumbers]

6 hours ago, newtovalue said:

Not apples to apples - but Intact just bought a UK insurance company at 1x annual premiums (with a 96 percent combined ratio)

 

If we apply that multiple to FFH - we get a market cap of $27 billion usd or approximately $1600 cad a share.

 

Fairfax is cheap no matter how you cut it 

 

 

And they partially financed it with stock issued around 2.5x book. Trisura also recently issued equity at similar multiples. Smart moves by the management teams. It’s the easiest way to grow book value!

[Thrifty3000]

On 9/7/2023 at 8:39 AM, newtovalue said:

Not apples to apples - but Intact just bought a UK insurance company at 1x annual premiums (with a 96 percent combined ratio)

 

If we apply that multiple to FFH - we get a market cap of $27 billion usd or approximately $1600 cad a share.

 

Fairfax is cheap no matter how you cut it 

 

 

Interesting you point that out, as I actually made a mental note recently that I’ve been seeing a pattern of deals valued around 1x premiums. I believe FFH has had some in this neighborhood recently. But, I’ve been meaning to follow up to confirm that it’s not just my imagination. I have a hunch you’re probably right on the valuation front. It actually makes perfect sense to have a valuation around 1x premiums if you assume the insurance income, investment income and growth will provide a reasonable long term return.

[SafetyinNumbers]

5 hours ago, Thrifty3000 said:

Interesting you point that out, as I actually made a mental note recently that I’ve been seeing a pattern of deals valued around 1x premiums. I believe FFH has had some in this neighborhood recently. But, I’ve been meaning to follow up to confirm that it’s not just my imagination. I have a hunch you’re probably right on the valuation front. It actually makes perfect sense to have a valuation around 1x premiums if you assume the insurance income, investment income and growth will provide a reasonable long term return.

It would be interesting to know how much float there was too. Berkshire bought Alleghany float for free and Brookfield has been buying up cheap float too. 

[newtovalue]

15 hours ago, Thrifty3000 said:

Interesting you point that out, as I actually made a mental note recently that I’ve been seeing a pattern of deals valued around 1x premiums. I believe FFH has had some in this neighborhood recently. But, I’ve been meaning to follow up to confirm that it’s not just my imagination. I have a hunch you’re probably right on the valuation front. It actually makes perfect sense to have a valuation around 1x premiums if you assume the insurance income, investment income and growth will provide a reasonable long term return.

Yes agreed!  I may go back and try to see where past insurance deals got done (relative to float). 
 

this is another useful metric to either prove or disprove the thesis that FFH is cheap!

 

 

[SafetyinNumbers]

Fairfax buybacks in August 

[Viking]

23 minutes ago, SafetyinNumbers said:

Fairfax buybacks in August 

@SafetyinNumbers thanks for posting. It is nice to see the backbacks happening again. I am hopeful Fairfax can keep taking out a minimum of 2% of effective shares outstanding each year - keeping the trend in recent years going. The buybacks also signal the company continues to see their shares as being undervalued. Obviously shares aren’t as cheap as prior years but the company’s earnings and prospects have improved greatly in recent years.

[SafetyinNumbers]

1 hour ago, Viking said:

@SafetyinNumbers thanks for posting. It is nice to see the backbacks happening again. I am hopeful Fairfax can keep taking out a minimum of 2% of effective shares outstanding each year - keeping the trend in recent years going. The buybacks also signal the company continues to see their shares as being undervalued. Obviously shares aren’t as cheap as prior years but the company’s earnings and prospects have improved greatly in recent years.

They are definitely not priced as low but arguably cheaper based on the outlook. Durability is arguably up a lot too which reduces risk and allows for a higher multiple. 

I’m not saying I can win these arguments.

[UK]

https://www.theinsurer.com/reinsurancemonth/odysseyres-overy-further-corrections-are-needed-at-1-1/

[returnonmycapital]

On 1/20/2023 at 10:21 AM, gfp said:

I had missed these filings showing Brian Bradstreet gobbling up Fairfax preferred shares in December -

https://www.canadianinsider.com/company-insider-filings?ticker=FFH

I like the same variable rate preferreds (series D/F/H/J) that Mr. Bradstreet has been buying. Fairfax has announced their dividends for the 4th quarter and they show current yields of around 11% (annualized) across the different variable-rate series. The series D is redeemable at par at the end of 2024 (F in March 2025, with H/J following in Sep and Dec, respectively). Based on the current declared dividends, the variable rate prefs are quite expensive for Fairfax (between 7.32% and 8.31% at par) and yield as much as double their fixed-rate equivalents. Of course, interest rates could always decline between now and the end of 2024 but they would have to go done a good deal to bring them back into line with the fixed-rate series. They're not easy to trade but given their cost to Fairfax, my thinking is Mr. Bradstreet sees a probability of redemption and, if so, the annualized return on today's prices range from 28% to 42%.

[SafetyinNumbers]

Lauren Templeton just dropped a new podcast featuring Ben Watsa 

 

https://podcasts.apple.com/ca/podcast/investing-the-templeton-way/id1604395168?i=1000627607421

 

It’s a terrific listen for long term Fairfax and Fairfax India shareholders. He makes a very good case why India is a tremendous investment opportunity and provides comfort that Fairfax will have controlling shareholders that keeps the culture that his father has fostered.

Edited September 12, 2023 by SafetyinNumbers

[glider3834]

10 hours ago, SafetyinNumbers said:

Lauren Templeton just dropped a new podcast featuring Ben Watsa 

 

https://podcasts.apple.com/ca/podcast/investing-the-templeton-way/id1604395168?i=1000627607421

 

It’s a terrific listen for long term Fairfax and Fairfax India shareholders. He makes a very good case why India is a tremendous investment opportunity and provides comfort that Fairfax will have controlling shareholders that keeps the culture that his father has fostered.

agree - great interview & thanks for posting 

[Grenville]

Thank you for sharing the interview. Nice to get to know Ben Watsa better along with his background. Appreciate his perspective.

 

I did think he was a good salesman when he talked up family control but part of me thinks that should be earned(either through purchased ownership or at the time of founding) versus given. Shareholders should have the ability to choose because there are a lot of counter examples to family control not always being in the best interest of short or long term shareholders. Also who knows how great Ben will be when Prem retires or who will take Ben’s place when he retires. Cementing control prevents any future check both short or long term. 
 

It was cool though to hear the anecdotes about Sir John and Tony 

 

[SafetyinNumbers]

4 hours ago, Grenville said:

Thank you for sharing the interview. Nice to get to know Ben Watsa better along with his background. Appreciate his perspective.

 

I did think he was a good salesman when he talked up family control but part of me thinks that should be earned(either through purchased ownership or at the time of founding) versus given. Shareholders should have the ability to choose because there are a lot of counter examples to family control not always being in the best interest of short or long term shareholders. Also who knows how great Ben will be when Prem retires or who will take Ben’s place when he retires. Cementing control prevents any future check both short or long term. 
 

It was cool though to hear the anecdotes about Sir John and Tony 

 

I think his task as future Chairman will be to maintain Fairfax’s culture and having grown up in it, he’s probably best suited to do so. Hopefully Prem still has a long tenure and it’s not a role, Ben, will have to takeover any time soon giving him that much more experience when he does.

[Xerxes]

23 hours ago, SafetyinNumbers said:

Lauren Templeton just dropped a new podcast featuring Ben Watsa 

 

https://podcasts.apple.com/ca/podcast/investing-the-templeton-way/id1604395168?i=1000627607421

 

It’s a terrific listen for long term Fairfax and Fairfax India shareholders. He makes a very good case why India is a tremendous investment opportunity and provides comfort that Fairfax will have controlling shareholders that keeps the culture that his father has fostered.

thanks the post. 
good to hear from him. Kind of funny that his kids own the very same stock that the grand dad would be shorting 

[Thrifty3000]

13 hours ago, Grenville said:

Thank you for sharing the interview. Nice to get to know Ben Watsa better along with his background. Appreciate his perspective.

 

I did think he was a good salesman when he talked up family control but part of me thinks that should be earned(either through purchased ownership or at the time of founding) versus given. Shareholders should have the ability to choose because there are a lot of counter examples to family control not always being in the best interest of short or long term shareholders. Also who knows how great Ben will be when Prem retires or who will take Ben’s place when he retires. Cementing control prevents any future check both short or long term. 
 

It was cool though to hear the anecdotes about Sir John and Tony 

 

I'm pretty sure I heard Ben say the company would always be professionally managed. If memory serves, I believe Warren Buffett once wrote that one of the most effective, if not the most effective, form of corporate governance stems from a controlling owner (like a family) hiring/overseeing a professional manager. It makes sense to me. The controlling owner has plenty of incentive to have the most effective manager possible, and therefore can hold the manager accountable for performance. It's much better than the alternative situations:

 

- where the controlling shareholder runs the company personally and doesn't answer to anyone.

- or where a group of disinterested board members care more about board compensation and notoriety (elephant bumping) than they care about holding the CEO accountable (see the majority of S&P 500 boards for examples).

Edited September 13, 2023 by Thrifty3000

[UK]

On 9/12/2023 at 5:40 PM, SafetyinNumbers said:

Lauren Templeton just dropped a new podcast featuring Ben Watsa 

 

https://podcasts.apple.com/ca/podcast/investing-the-templeton-way/id1604395168?i=1000627607421

 

It’s a terrific listen for long term Fairfax and Fairfax India shareholders. He makes a very good case why India is a tremendous investment opportunity and provides comfort that Fairfax will have controlling shareholders that keeps the culture that his father has fostered.

 

Thanks! Very interesting!

 

Do I understand correctly, that letters of Marval Capital are available only for its clients?

 

Edited September 14, 2023 by UK

[Hamburg Investor]

On 9/1/2023 at 8:27 PM, Thrifty3000 said:

@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.)

 

 

 

Hi, this is my first post here, as I just joined, but have been following here for a long time. I am a Fairfax Shareholder since 2013. It's always been one of my Top5 holdings. Over the last year I bought more and more and it's my biggest stock holding today. I am German and live in Hamburg (sorry for my english...).

Totally agree, @Thrifty. I replied to Viking at Seeking Alpha regarding the assets topic here; unfortunately they kicked Vikings and my postings (don't know why...?) and as Viking asked me to join I just did and now I just thought to write that down again, why I think Assets should grow way stronger and more in a range of $4bn to $9bn per year over the next couple of years:

At the core my question was, if asset growth isn't a function of earnings and growth (... decline. ..) of float. So maybe something like: Add 1. Earnings (Dividends, interest, Earnings from profitability in insurance) to 2. return of stock portfolio (e. g. assuming 10% growth but subtracting dividends again, so not double counting) to 3. the swap (so assuming a price increase of Fairfax of e. g. 10%/year for being conservative and do the math, how the Swap as an asset develops from year to year...)  to 4. growth of float (GIG to come...). Subtract taxes, overhead costs, runoff dividends, buybacks (although the last too add to growth of intrinsic value, but not to asset growth; but buybacks help accelerating the "per share" assets. One could assume reinvesting the dividends, for getting the IRR...). I am pretty sure I missed something and might be wrong with this or that, but maybe the direction of thinking is ok? Anyway, if one does that, you'll get way more assets growth from year to year. As Thrifty shows here, the asset base has grown around $3bn per year since 2 years, and then there have been headwinds to asset growth like the massive devaluation of bonds. So why should assets growth go back to $1bn?

Another perspective regarding asset growth could be to just look at Prems outspoken goal to grow Fairfax intrinsic value with a rate of return of 15% on average over the very longterm. If you think he'd manages that, then the assets (minus dividend, minus buybacks) should roughly grow at the same pace. So maybe 15% growth minus 1.5% (div) minus 3.5% (buybacks) for 10% asset growth/year (and around 13.5% assets per share growth). If you'd invest the divs back to Fairfax and leave away taxes and assume a buying price of 1.0 book, then the investors personal growth in Fairfax assets would again roughly equal that 15%.

And then I think, Prem wouldn't tell us shareholders 15% as a goal, if he would assume, reaching 15% being a "hard to do" thing. My best guess is that he'd communicate with a margin of safety. He'd tell us 15%, if he'd think that's safe and 16% or even 18% being a "maybe", but not the other way around. In fact he has reached some percentage points over that 15% CAGR over 37 years and this with just over a decade of zero rate interest in the rearview mirror (so just leaving a pretty hard time for insureres behind us, not to mention the soft market, growth beating value, the deflation insurance, that I wouldn't call a bet...). Look at Prems CAGR before interest went down.

 

And then there's another question: When, if not now, should Prem make over 15% to get to that average of 15%? When if not in a hard market, in times where value outperforms growth, when the companies CR is well below the first 20 years of Fairfax and below the 37y average? And then there's GIG, Digit, Eurobank, the Swap, Fairfax India at depressed valuation, all those wholly owned little insurance companies over the world really growing strong on average... Long story short: I think, Fairfax might grow intrinsic value (and asset base + divs + buybacks) well over 15% and should grow not below 15%. Therefore personally I think 15% for the next few years being conservative, so with a margin of safety included (of course it still could come worse as always, but I think this being a nice margin of safety, others may disagree, which is fine).

One note regarding relative valuation: The S&P500 is valued a bit above a PE of 25. Fairfax is valued at a PE of 6 (or 5). At the same time Fairfax roe (15%) might be above that of the S&P500 (return has been around 11.8% on average, so roe should be around that percentage too...). So Mr. Market seems a little bit weird again wanting 4 (or 5) times as much from me for each share of the markets "okay" earnings then for Fairfax "good earnings". If Fairfax would triple tomorrow and I had to choose either taking the S&P500 or Fairfax as a holding for 10 years, I personally wouldn't bet on the S&P500 being the better investamnt over the next 10 years.

Edited September 14, 2023 by Hamburg Investor

[UK]

On 9/14/2023 at 11:56 AM, UK said:

 

Thanks! Very interesting!

 

Do I understand correctly, that letters of Marval Capital are available only for its clients?

 

 

Also found this one:  https://www.marvalcapital.com/interviews  or https://vimeo.com/862872315

 

Edited September 15, 2023 by UK

[Viking]

On 9/14/2023 at 8:14 AM, Hamburg Investor said:

Hi, this is my first post here, as I just joined, but have been following here for a long time. I am a Fairfax Shareholder since 2013. It's always been one of my Top5 holdings. Over the last year I bought more and more and it's my biggest stock holding today. I am German and live in Hamburg (sorry for my english...).

Totally agree, @Thrifty. I replied to Viking at Seeking Alpha regarding the assets topic here; unfortunately they kicked Vikings and my postings (don't know why...?) and as Viking asked me to join I just did and now I just thought to write that down again, why I think Assets should grow way stronger and more in a range of $4bn to $9bn per year over the next couple of years:

At the core my question was, if asset growth isn't a function of earnings and growth (... decline. ..) of float. So maybe something like: Add 1. Earnings (Dividends, interest, Earnings from profitability in insurance) to 2. return of stock portfolio (e. g. assuming 10% growth but subtracting dividends again, so not double counting) to 3. the swap (so assuming a price increase of Fairfax of e. g. 10%/year for being conservative and do the math, how the Swap as an asset develops from year to year...)  to 4. growth of float (GIG to come...). Subtract taxes, overhead costs, runoff dividends, buybacks (although the last too add to growth of intrinsic value, but not to asset growth; but buybacks help accelerating the "per share" assets. One could assume reinvesting the dividends, for getting the IRR...). I am pretty sure I missed something and might be wrong with this or that, but maybe the direction of thinking is ok? Anyway, if one does that, you'll get way more assets growth from year to year. As Thrifty shows here, the asset base has grown around $3bn per year since 2 years, and then there have been headwinds to asset growth like the massive devaluation of bonds. So why should assets growth go back to $1bn?

Another perspective regarding asset growth could be to just look at Prems outspoken goal to grow Fairfax intrinsic value with a rate of return of 15% on average over the very longterm. If you think he'd manages that, then the assets (minus dividend, minus buybacks) should roughly grow at the same pace. So maybe 15% growth minus 1.5% (div) minus 3.5% (buybacks) for 10% asset growth/year (and around 13.5% assets per share growth). If you'd invest the divs back to Fairfax and leave away taxes and assume a buying price of 1.0 book, then the investors personal growth in Fairfax assets would again roughly equal that 15%.

And then I think, Prem wouldn't tell us shareholders 15% as a goal, if he would assume, reaching 15% being a "hard to do" thing. My best guess is that he'd communicate with a margin of safety. He'd tell us 15%, if he'd think that's safe and 16% or even 18% being a "maybe", but not the other way around. In fact he has reached some percentage points over that 15% CAGR over 37 years and this with just over a decade of zero rate interest in the rearview mirror (so just leaving a pretty hard time for insureres behind us, not to mention the soft market, growth beating value, the deflation insurance, that I wouldn't call a bet...). Look at Prems CAGR before interest went down.

 

And then there's another question: When, if not now, should Prem make over 15% to get to that average of 15%? When if not in a hard market, in times where value outperforms growth, when the companies CR is well below the first 20 years of Fairfax and below the 37y average? And then there's GIG, Digit, Eurobank, the Swap, Fairfax India at depressed valuation, all those wholly owned little insurance companies over the world really growing strong on average... Long story short: I think, Fairfax might grow intrinsic value (and asset base + divs + buybacks) well over 15% and should grow not below 15%. Therefore personally I think 15% for the next few years being conservative, so with a margin of safety included (of course it still could come worse as always, but I think this being a nice margin of safety, others may disagree, which is fine).

One note regarding relative valuation: The S&P500 is valued a bit above a PE of 25. Fairfax is valued at a PE of 6 (or 5). At the same time Fairfax roe (15%) might be above that of the S&P500 (return has been around 11.8% on average, so roe should be around that percentage too...). So Mr. Market seems a little bit weird again wanting 4 (or 5) times as much from me for each share of the markets "okay" earnings then for Fairfax "good earnings". If Fairfax would triple tomorrow and I had to choose either taking the S&P500 or Fairfax as a holding for 10 years, I personally wouldn't bet on the S&P500 being the better investamnt over the next 10 years.

@Hamburg Investor thank you for coming over to the dark side and joining CofBF. The more discussion and debate we can get the better. We are all trying to learn (and hopefully make a little money along the way).

 

Your post above outlines a major flaw with my 3 year forecasts for Fairfax: i am likely being too conservative for 2024 and 2025. Part of this was by design. When i started at Kraft many years ago one of my first bosses taught us newbies the art of sandbagging when building a forecast (very important when your quarterly bonus payout was tied to it).
 

On reflection i likely need to make some adjustments to parts of my 3 year forecast (i feel a little like i am getting my hand slapped by senior management - a little sandbagging was ok… but too much got you into trouble).

 

What am i missing? Two things:

1.) capital allocation skills of Hamblin Watsa: they have been hitting the ball out of the part since 2018 when it comes to capital allocation.

2.) power of compounding - well understood by members on this board:

- a 15% return per year is a double in less than 5 years.

- a 20% return is a double in about 3.5 years.

 

So yes, i need to get more realistic with my estimate for how fast investments (and returns from those bigger numbers) will be growing in the coming years. Growth of growth is the secret sauce that is now kicking in at Fairfax (due to double digit growth in insurance and investments AND improving underwriting and much higher investment returns). 
 

Today, Fairfax is delivering a 20% ROE. I think they will be able to deliver a high teens ROE over the next three years (2023-2025). 

 

I like my earnings per share estimate of $160/share for 2023. My estimates for 2024 ($165) and 2025 ($174) need to move higher. 

 

Edited September 15, 2023 by Viking

[SafetyinNumbers]

4 hours ago, Viking said:

@Hamburg Investor thank you for coming over to the dark side and joining CofBF. The more discussion and debate we can get the better. We are all trying to learn (and hopefully make a little money along the way).

 

Your post above outlines a major flaw with my 3 year forecasts for Fairfax: i am likely being too conservative for 2024 and 2025. Part of this was by design. When i started at Kraft many years ago one of my first bosses taught us newbies the art of sandbagging when building a forecast (very important when your quarterly bonus payout was tied to it).
 

On reflection i likely need to make some adjustments to parts of my 3 year forecast (i feel a little like i am getting my hand slapped by senior management - a little sandbagging was ok… but too much got you into trouble).

 

What am i missing? Two things:

1.) capital allocation skills of Hamblin Watsa: they have been hitting the ball out of the part since 2018 when it comes to capital allocation.

2.) power of compounding - well understood by members on this board:

- a 15% return per year is a double in less than 5 years.

- a 20% return is a double in about 3.5 years.

 

So yes, i need to get more realistic with my estimate for how fast investments (and returns from those bigger numbers) will be growing in the coming years. Growth of growth is the secret sauce that is now kicking in at Fairfax (due to double digit growth in insurance and investments AND improving underwriting and much higher investment returns). 
 

Today, Fairfax is delivering a 20% ROE. I think they will be able to deliver a high teens ROE over the next three years (2023-2025). 

 

I like my earnings per share estimate of $160/share for 2023. My estimates for 2024 ($165) and 2025 ($174) need to move higher. 

 

Just a reminder that consensus is much lower and if you are wondering which analyst has the low estimate for the next 5 years (only for the last three), it’s our friend at Morningstar. The declining earnings estimates (and historical volatility in earnings) basically makes it unownable for quants and for active institutional investors who use the same screens as quants in order to compete with them. 
 

 

[ValueMaven]

Grants Interest Rate has a very compelling piece on the reinsurance industry and the hard pricing market current occurring.  While FFH is not specifically mentioned, there are some interesting nuggets in the article.