Fairfax 2023

[dealraker]

3 hours ago, MMM20 said:

 

“May you live in interesting times. May you also own Fairfax Financial, with its massive short duration fixed income portfolio, when interest rates spike off the lower bound and they then go on offense, growing and redeploying that capital without a huge hole in their balance sheet like competitors who for some reason get to wave it all away as short term losses (those 30yr 3% coupon bonds are held to maturity, everyone!), but it takes years for the market to notice the implications because of liquidity or indexing or blackberry or something, and you get buy at a huge discount to a step change higher intrinsic value. You’re welcome.”

 

I heard that was inscribed on some tablets in 3000 BC.

 

Stock of apparent great future returns seem to wait on the end of melodramatic forum posts?  Or is that just my selective memory?  LOL.  

[MMM20]

21 hours ago, dealraker said:

Stock of apparent great future returns seem to wait on the end of melodramatic forum posts?  Or is that just my selective memory?  LOL.  

 

Sorry, I don't follow. If that post came off as too much of a troll... my bad.

 

Most of the melodramatic posts were happening in late 2020 / early 2021 by guys who thought Prem was a confirmed dinosaur and the stock was never going anywhere, but maybe that's just my selective memory!

 

Seems cheaper today than it did then, but I'm just a guy on the internet and I'm wrong about half the time.

 

Let's not take ourselves too seriously.

 

Edited October 2, 2023 by MMM20

[dealraker]

1 hour ago, MMM20 said:

 

Sorry, I don't follow. If that post came off as too much of a troll... my bad.

 

Most of the melodramatic posts were happening in late 2020 / early 2021 by guys who thought Prem was a confirmed dinosaur and the stock was never going anywhere, but maybe that's just my selective memory!

 

Seems cheaper today than it did then, but I'm just a guy on the internet and I'm wrong about half the time.

 

Let's not take ourselves too seriously.

 

Being silly MMM20.  Nothing more.   

[MMM20]

Just now, dealraker said:

Being silly MMM20.  Nothing more.   

[gfp]

I wonder what the losses will be on their poorly timed forward purchases of 3 year bond futures.

edit: I guess most of the losses would have already been reflected in the Q2 figures?

 

 

V. Watsa

[indiscernible] portfolio, right, it's only the bond portfolio. And the important point that is all on 80% of our bond portfolio is government treasuries mainly, but government wherever we operate, Canada -- Canadian governments and other countries. And only 14%, I think. we said was corporate, something like that. And that's all very short term that's coming due relatively soon. And what we have done, Tom, is because these are coming due in the next 3 months, 6 months, we like the rates in the first quarter. So we locked in 3.7% -- 3.75% for U.S. government treasuries for 3 years. So we locked it in ahead of the maturity. We are happy with 3.75, could go to 4.25%, 4.5%, I don't know. It could go to 2.5, 3.75 was good. We locked it in, and that's ahead of the maturities in the next 3 months, 6 months.

Edited October 2, 2023 by gfp

[SafetyinNumbers]

6 minutes ago, gfp said:

I wonder what the losses will be on their poorly timed forward purchases of 3 year bond futures.

 

 

V. Watsa

[indiscernible] portfolio, right, it's only the bond portfolio. And the important point that is all on 80% of our bond portfolio is government treasuries mainly, but government wherever we operate, Canada -- Canadian governments and other countries. And only 14%, I think. we said was corporate, something like that. And that's all very short term that's coming due relatively soon. And what we have done, Tom, is because these are coming due in the next 3 months, 6 months, we like the rates in the first quarter. So we locked in 3.7% -- 3.75% for U.S. government treasuries for 3 years. So we locked it in ahead of the maturity. We are happy with 3.75, could go to 4.25%, 4.5%, I don't know. It could go to 2.5, 3.75 was good. We locked it in, and that's ahead of the maturities in the next 3 months, 6 months.

Shouldn’t be much. I think the 3 year was up ~20bps last quarter. There should be some offset from IFRS 17 as the discount rate is up. That should also help the actual combined ratio (vs the reported combined ratio which is not discounted).

[MMM20]

2 hours ago, gfp said:

I wonder what the losses will be on their poorly timed forward purchases of 3 year bond futures.

edit: I guess most of the losses would have already been reflected in the Q2 figures?

 

 

V. Watsa

[indiscernible] portfolio, right, it's only the bond portfolio. And the important point that is all on 80% of our bond portfolio is government treasuries mainly, but government wherever we operate, Canada -- Canadian governments and other countries. And only 14%, I think. we said was corporate, something like that. And that's all very short term that's coming due relatively soon. And what we have done, Tom, is because these are coming due in the next 3 months, 6 months, we like the rates in the first quarter. So we locked in 3.7% -- 3.75% for U.S. government treasuries for 3 years. So we locked it in ahead of the maturity. We are happy with 3.75, could go to 4.25%, 4.5%, I don't know. It could go to 2.5, 3.75 was good. We locked it in, and that's ahead of the maturities in the next 3 months, 6 months.

Plus big picture FFH is still positioned so short duration vs all but maybe WRB, right? If rates keep rising they are most likely a net beneficiary vs competition and can keep expending our duration. We aren’t talking a long duration bond portfolio down 50% the past 3 years.

 

Edited October 2, 2023 by MMM20

[gfp]

1 hour ago, MMM20 said:

Plus big picture FFH is still positioned so short duration vs all but maybe WRB, right?

 

Nobody's shorter than Warren!  The master at work

[MMM20]

11 minutes ago, gfp said:

 

Nobody's shorter than Warren!  The master at work

I meant WR Berkley but might have that wrong!
 

Edited October 2, 2023 by MMM20

[gfp]

1 minute ago, MMM20 said:

I meant WR Berkley but might have that wrong!
 

I know what you meant.  I'm saying Berkshire's bond duration has 'em all beat.

[UK]

47 minutes ago, gfp said:

 

Nobody's shorter than Warren!  The master at work

 

True! But the problem is they are kind of diversified and far from 'pure play' in terms of this 'rate exposure', especially because of their enormous position in Apple?

 

Edited October 2, 2023 by UK

[MMM20]

@gfp 

 

yeah I guess so - I would just say BRK’s portfolio is still much longer duration overall when you include the equities and think about it from an overall asset allocation perspective. BRK is more sensitive to higher discount rates lowering the NPVs of AAPL, GEICO, the utility, and the railroad, but of course still a cash machine and can reinvest at lower valuations so still arguably a counter cyclical element to intrinsic value.
 

FFH is still more than half cash and short term bonds and a much higher proportion of ~0 cost float. So while historically they haven’t had anything close to BRK’s FCFE (vs market cap) to redeploy, it seems to me that’s changed over the past couple years and FFH is in a similar position of strength now, albeit with both 1) an overall “lower risk” portfolio heavy in cash and short term bonds and 2) higher float leverage so still inherently much more downside in a 100 year flood (and much higher upside too especially from this valuation)
 

Am I way off with this?

 

Edited October 3, 2023 by MMM20

[dartmonkey]

Berkshire 2022 AR (p. K-70). Hard to beat for short duration, and a nicely timed shift in 2022, just like Fairfax:

 

December 31,                                                       2022                  2021

ASSETS

Insurance and Other:

Cash and cash equivalents*                             $32,260             $85,319

Short-term investments in U.S.TreasuryBills.    92,774              58,535

Investments in fixed maturity securities             25,128              16,434

Investments in equity securities                      308,793             350,719

Equity method investments                               28,050                16,045

...

Total                                                                  725,989              741,993

[gfp]

Berkshire has $122k Billion in T-bills, $22.3 Billion in bonds with average maturity of something less than 2 years and $25 billion in cash earning whatever cash earns on corporate Gov. MM sweep accounts.

 

So outside of equities, Berkshire's very large pool of float is invested almost entirely in T-bill like instruments.  Berkshire will make something like $8 Billion in government interest this year.

 

I don't know of any other insurance company, except maybe Global Indemnity recently as they shop the company for sale, that kept their entire fixed maturity portfolio at around 6 months.

 

Just the absurdity of a Trillion dollar asset company holding only $22.3 in bonds is remarkable enough, but even those bonds are less than 2 year duration.

[glider3834]

5 hours ago, gfp said:

I wonder what the losses will be on their poorly timed forward purchases of 3 year bond futures.

edit: I guess most of the losses would have already been reflected in the Q2 figures?

 

 

V. Watsa

[indiscernible] portfolio, right, it's only the bond portfolio. And the important point that is all on 80% of our bond portfolio is government treasuries mainly, but government wherever we operate, Canada -- Canadian governments and other countries. And only 14%, I think. we said was corporate, something like that. And that's all very short term that's coming due relatively soon. And what we have done, Tom, is because these are coming due in the next 3 months, 6 months, we like the rates in the first quarter. So we locked in 3.7% -- 3.75% for U.S. government treasuries for 3 years. So we locked it in ahead of the maturity. We are happy with 3.75, could go to 4.25%, 4.5%, I don't know. It could go to 2.5, 3.75 was good. We locked it in, and that's ahead of the maturities in the next 3 months, 6 months.

just for context, looks like they locked these rates in on around 9% of their fixed income portfolio

 

 

[SafetyinNumbers]

4 hours ago, MMM20 said:

@gfp 

 

yeah I guess so - I would just say BRK’s portfolio is still much longer duration overall when you include the equities and think about it from an overall asset allocation perspective. BRK is more sensitive to higher discount rates lowering the NPVs of AAPL, GEICO, the utility, and the railroad, but of course still a cash machine and can reinvest at lower valuations so still arguably a counter cyclical element to intrinsic value.
 

FFH is still more than half cash and short term bonds and a much higher proportion of ~0 cost float. So while historically they haven’t had anything close to BRK’s FCFE (vs market cap) to redeploy, it seems to me that’s changed over the past couple years and FFH is in a similar position of strength now, albeit with both 1) an overall “lower risk” portfolio heavy in cash and short term bonds and 2) higher float leverage so still inherently much more downside in a 100 year flood.
 

Am I way off with this?

 

I agree with your take @MMM20. The float to market cap ratio locks in so much ROE vs the comps. Fairfax’s equity portfolio is also a lot cheaper on traditional measures of value so arguably adds relatively high long term built in ROE. Plus they have a disproportionate amount of earnings to redeploy in safe acquisitions like buying the rest of Allied World, Brit and Odyssey over the next few years which will just makes them all the more durable.

 

I’m betting the index huggers chasing the stock will start using the increased durability as a narrative for why they are buying stock at 1.5x book value. It will still be the right thing to do as it might even get to 3x like it did in 1998. For that to happen, the ROE has to be elevated for a few years in a row.
 

We are off to a good start in 2023. The low risk income off the float, hard insurance market, high level of associates income, Digit/BIAL IPOs make it seem likely the ROE can stay strong for a few years which is why I continue to think Fairfax is a fat pitch. @Viking’s earnings forecast could be conservative. Value investors rightly focus on the margin of safety but I think most investors actually interpret that as avoiding drawdowns.
 

While a lot of us here spend a lot of time thinking about Fairfax almost no one else does. It’s still well under owned by Canadian asset managers despite its weight in the S&P/TSX Composite at ~89bps at Q323. Today, it outperformed by almost another 5%. 100 bps is within spitting distance but passing Intact which is around 125bps might be the bigger deal as PMs likely only want to own one P&C insurer even though Fairfax is special because of its equity portfolio and capital allocation strategy. Ironically, the higher it goes, the higher it’s likely to go which means most value investors will likely sell too early. 

 

Earnings estimates still show declining earnings for the next few years mostly because expectations are for lower interest rates and low investment returns on equity portfolio. These analysts from what I can tell haven’t actually taken the time to appreciate how cheap, for example, Eurobank might be and how big a chunk of the portfolio it is. While it may be conservative to assume low single digit returns on the equity portfolio, it doesn’t mean it’s a probable forecast.
 

Quants and active manager that rely on quants (i.e. almost every asset manager) can’t even see Fairfax because of the declining earnings forecasts and high variability of historical results. I think there is a good chance analysts will start increasing their estimates to something more realistic if Fairfax keeps executing which again should be easier given the composition of earnings is more predictable. That will finally get the quants thinking about Fairfax.
 

Of course, anything can happen and nothing is guaranteed in markets. It’s always a bet and we mostly all see the odds differently. 

[nwoodman]

3 hours ago, Haryana said:

 

Berkshire vs Fairfax, Millennium Till Month

 

So including divs FFH @ 1x’s book is a 12% CAGR.  Interestingly this is close to my base case.  Still plenty of room for P/B expansion and earnings growth.  Extraordinary really.  Thanks for the graph.

[Xerxes]

9 hours ago, Haryana said:

 

Berkshire vs Fairfax, Millennium Till Month

 

Thanks. For FFH in the chart the dividend seems to be included I am guessing. How does the mechanics of the chart works ?

 

does it assume that the $10 cash dividend is re-invested back into FFH when it was cashed out. Pretty much assuming a synthetic total capital return made entirely of repurchases (ignoring tax)

 

or is the dividend is not assumed to be re-invested ?

[MMM20]

10 hours ago, Haryana said:

 

Berkshire vs Fairfax, Millennium Till Month

 

 

Here's the corresponding updated valuation on P/B (for what it's worth) with MKL thrown in. BRK (~1.5x) and FFH (~1x) are both valued at roughly the same multiples now as they were to start the millennium. I think to some extent it speaks to the fact that most investors prefer a smooth ~10% to a lumpy ~15% (long term looking forward IMHO) because it's just easier to sleep at night and hold on through thick and thin.

 

 

 

Edited October 3, 2023 by MMM20

[no_free_lunch]

I think there was a style drift in ffh few years back.  That's what concerned me.  Am I buying the same company of the past?  I only got back in because viking made a compelling argument and the share price collapsed.  

[MMM20]

17 minutes ago, no_free_lunch said:

I think there was a style drift in ffh few years back.  That's what concerned me.  Am I buying the same company of the past?  I only got back in because viking made a compelling argument and the share price collapsed.  

Style drift in what sense? (I thought they were just doing the same old thing and it was falling more and more out of popular favor in a ZIRP world - but I have been a shareholder for less than three years)

 

Edited October 3, 2023 by MMM20

[SafetyinNumbers]

2 hours ago, MMM20 said:

 

Here's the corresponding updated valuation on P/B (for what it's worth) with MKL thrown in. BRK (~1.5x) and FFH (~1x) are both valued at roughly the same multiples now as they were to start the millennium. I think to some extent it speaks to the fact that most investors prefer a smooth ~10% to a lumpy ~15% (long term looking forward IMHO) because it's just easier to sleep at night and hold on through thick and thin.

 

 

 

I think the large transition from value investing to passive and quants has amplified the desire for a smooth 10% to a lumpy 15%. Social value is also a much more relevant factor and BRK/MKL enjoy very loyal shareholder basis. They never think about selling. Meanwhile, almost every Fairfax bull I talk to is waiting anxiously for Prem to make a mistake so they can sell before experiencing a drawdown.

[no_free_lunch]

45 minutes ago, MMM20 said:

Style drift in what sense? (I thought they were just doing the same old thing and it was falling more and more out of popular favor in a ZIRP world - but I have been a shareholder for less than three years)

 

 

They were making giant short bets on equity indexes (I may be slightly wrong on the terminology but that was the essence of it) for years.  As the market cranked forward over the past decade this was one component of why they lagged so badly.  I believe they have now stopped with the shorting.  This general market shorting only started in (I'm guessing here) 2010, it was not part of their original strategy.

 

I like them for everything else, making counter-cyclical bets and buying out of favor companies.  I like that they have an insurance company they can draw additional capital from.  I just don't want them making macro bets.  If they want to hedge I would prefer they just hold more bonds.

Edited October 3, 2023 by no_free_lunch

[TwoCitiesCapital]

1 hour ago, no_free_lunch said:

 

They were making giant short bets on equity indexes (I may be slightly wrong on the terminology but that was the essence of it) for years.  As the market cranked forward over the past decade this was one component of why they lagged so badly.  I believe they have now stopped with the shorting.  This general market shorting only started in (I'm guessing here) 2010, it was not part of their original strategy.

 

I like them for everything else, making counter-cyclical bets and buying out of favor companies.  I like that they have an insurance company they can draw additional capital from.  I just don't want them making macro bets.  If they want to hedge I would prefer they just hold more bonds.

To be fair, it wasn't really style drift. They shorted Japanese equities back in the 90s, pretty sure they did so again during the tech bubble, and were short credit/long CDS in 2008. 

 

Macro bets have LONG been part of their management style. If anything, the recent style drift has been the promise to not short again, but the near zero duration call was still a HUGE macro bet that shareholders paid for during 2016 - 2021 where shareholders received basically no income return from the fixed income portfolio. 

[treasurehunt]

15 hours ago, Haryana said:

 

Berkshire vs Fairfax, Millennium Till Month

 

 

Morningstar's data for Fairfax does not look correct here, probably because there was no FRFHF ticker back in 1999. Here's the same chart for FFH.TO - in USD and with dividends reinvested - for the same period. The total return is quite a bit lower.