Fairfax 2023

[Luke]

13F from FFH. That SP 500 position got cut in half, no idea what that was....and significant add to Orla Mining.

 

 

 

Edited November 14, 2023 by Luca

[gfp]

That's interesting - I feel like some of Fairfax's trading / changes to holdings are not reflected in the 13-F that Dataroma uses.  As an example, inside Odyssey Re (q3 NAIC filing) we see some Orla Mining purchases but also this purchase of Kennedy Wilson, where the 13-F shows no change in KW holdings during the quarter.  (this chart is security, purchase date, source, number of shares, dollar cost paid)

Edited November 14, 2023 by gfp

[ander]

On 11/12/2023 at 12:26 PM, Thrifty3000 said:

^ here is a post from August where I provided a table with about as conservative of a forecast possible of the earning power of each category in the investment portfolio in 2027.

 

You can see it’s by no means a stretch for the investment portfolio alone to earn $140+ per share. You can then add to that whatever number you want for underwriting earnings (say $0 to $50 per share) and for any opportunistic surprises (like pet insurance subsidiary sales), etc.

 

The most important number is the earning power of the bonds. My table shows a 4% interest rate. I follow the same logic as Leon Cooperman on this front. In a world with at least 2% inflation and 1.5% GDP growth it’s hard to envision a long term scenario where bonds don’t yield at least 4%.

 

Long story short, people worrying about FFH earnings falling off a cliff in 4 years are likely overweighting the significance of underwriting earnings and underweighting the power of a huge investment portfolio that can produce solid earnings per share without any heroics from the FFH investment team. 

There is some debate re: earnings post 4 years from now and of course hard to say what the world looks like the further out we go. I have BRKb put away for the next 20+ years and will take a look then unless if anything substantial changes. I see the clear path to why FRFHF has substantial upside within the coming years, but curious if anyone has a framework for thinking about long term value accretion 10+ years down the road. I know Prem targets 15%. Is that realistic?

[StubbleJumper]

19 minutes ago, ander said:

There is some debate re: earnings post 4 years from now and of course hard to say what the world looks like the further out we go. I have BRKb put away for the next 20+ years and will take a look then unless if anything substantial changes. I see the clear path to why FRFHF has substantial upside within the coming years, but curious if anyone has a framework for thinking about long term value accretion 10+ years down the road. I know Prem targets 15%. Is that realistic?

 

 

I would refer you to page 20 of Prem's annual letter from last year.  On that page you will find the table that he publishes every year, which depicts the growth in BV every year since the company's inception.  You will see that in the past 20 years, achieving 15%+ growth in BV has been the exception rather than the rule.

 

 

SJ

[Thrifty3000]

18 minutes ago, ander said:

There is some debate re: earnings post 4 years from now and of course hard to say what the world looks like the further out we go. I have BRKb put away for the next 20+ years and will take a look then unless if anything substantial changes. I see the clear path to why FRFHF has substantial upside within the coming years, but curious if anyone has a framework for thinking about long term value accretion 10+ years down the road. I know Prem targets 15%. Is that realistic?

 

Yes, 15% is possible long term. The magic is in the $2,700 of portfolio investments per share vs $900 per share of book value. You only need to earn 5% to 7% on that investment portfolio to have the kind of ROE you're talking about.

 

Could Warren Buffett earn 5% to 7% on a $60 billion portfolio. 100% guaranteed he could. Can Hamblin Watsa earn 5% to 7% on a $60 billion portfolio? I have a hunch they can going forward.

[StubbleJumper]

13 minutes ago, Thrifty3000 said:

 

Yes, 15% is possible long term. The magic is in the $2,700 of portfolio investments per share vs $900 per share of book value. You only need to earn 5% to 7% on that investment portfolio to have the kind of ROE you're talking about.

 

Could Warren Buffett earn 5% to 7% on a $60 billion portfolio. 100% guaranteed he could. Can Hamblin Watsa earn 5% to 7% on a $60 billion portfolio? I have a hunch they can going forward.

 

 

Well, that's the mental short-cut.  But, you are also making a few unstated assumptions, right?  When you say that 5% with 3x leverage = 15% ROE, implicitly, you are assuming that:

 

Underwriting income -

Interest expense -

Corporate overhead -

Income tax =

0 or a positive number

 

Most years that assumption will not hold.

 

 

SJ

[MMM20]

4 hours ago, ander said:

I know Prem targets 15%. Is that realistic?

 

Play around with the numbers yourself and decide what you think is fair, but this is one way to get to ~15%. Someone please tell me if I'm missing something stupid. Didn't sleep much last night.

 

Investments

~$40B cash+fixed income @ ~5-6% yield

~$20B equities @ ~8-10% total return

= ~$4-4.5B return on assets

 

Financed in part by

~$30B float @ ~2-3% net margin (~97-98% combined) = negative $600-900mm

~$10B in debt+prefs @ 7-8% = ~$700-800mm

= ~zero net financing cost

 

minus opex and taxes

 

~$3-3.5B net income

vs ~$20B equity 

 

= ~15%+ ROE

 

Let's see if Prem follows through on his Teledyne inclinations and takes out enough stock over time to shrink book value to 0. If he does, I think some of our board members' heads might explode

 

BTW even if we're looking at more like a ~10-12% ROE, that's enough for a ~15%+ per share return if they're using cash flow to buy back big chunks of stock at big discounts to IV (eg Dec '21).

 

Edited November 14, 2023 by MMM20

[StubbleJumper]

17 minutes ago, MMM20 said:

Someone please tell me if I'm missing something stupid.

 

That looks like roughly the right recipe to get a 15% ROE.  You need either outstanding investment results and to break even on the underwriting, or you need a bit of underwriting profit and a good investment return.  The recipe with a 97-98 CR and a 7.3% investment return looks like it would roughly do the job.

On page 15 of his annual letter, Prem included an interesting table on CRs and investment returns.  It's been unusual to simultaneously get both solid investment results AND profitable underwriting.  Some years (like in 2023, probably!) you get both and it provides a fantastic ROE. 

 

 

SJ 

[Spekulatius]

4 hours ago, SafetyinNumbers said:

On the face of it, it’s bigger, more liquid and has a larger dividend. 

More consistent results and property insurers trade at a higher multiple than re-insurers generally speaking.

 

A blue chip property insurer like RLI trades at 4x+ book for example. A mediocre re-insurers like AXS for example trades around book and often below.

Edited November 14, 2023 by Spekulatius

[SafetyinNumbers]

1 hour ago, Spekulatius said:

More consistent results and property insurers trade at a higher multiple than re-insurers generally speaking.

 

A blue chip property insurer like RLI trades at 4x+ book for example. A mediocre re-insurers like AXS for example trades around book and often below.

Quants love consistent earnings and analysts predicting growing earnings. Fairfax should have more consistent earnings the next few years given the structure of the bond portfolio. 

[MMM20]

18 minutes ago, SafetyinNumbers said:

Quants love consistent earnings and analysts predicting growing earnings. Fairfax should have more consistent earnings the next few years given the structure of the bond portfolio. 

 

Maybe the goldilocks scenario is that but still with some big drawdowns so Prem can do a few more big auction buybacks. Buckle up?

 

Edited November 14, 2023 by MMM20

[bluedevil]

2 hours ago, StubbleJumper said:

 

That looks like roughly the right recipe to get a 15% ROE.  You need either outstanding investment results and to break even on the underwriting, or you need a bit of underwriting profit and a good investment return.  The recipe with a 97-98 CR and a 7.3% investment return looks like it would roughly do the job.

On page 15 of his annual letter, Prem included an interesting table on CRs and investment returns.  It's been unusual to simultaneously get both solid investment results AND profitable underwriting.  Some years (like in 2023, probably!) you get both and it provides a fantastic ROE. 

 

 

SJ 

SJ

 

That is right.

My baseline view is something like the last five years is most probable in the next 10 years - 97 CR, 5% investment return, leading to 12% book value growth.

 

While in the past Fairfax has not fired on both cylinders at once, I think history very strongly suggests Fairfax will underwrite well - all its subsidiaries have done so after being under Fairfax management for a while, and the go forward plan is organic growth, as it has been for years now. 

 

So I think going forward it will more boil down to how well they invest their sizable (and hopefully growing) investment portfolio.  Uncertain, but much higher odds of hitting on both if one side of the equation is a consistent performer. 

 

 

 

 

[treasurehunt]

3 hours ago, MMM20 said:

Investments

~$40B cash+fixed income @ ~5-6% yield

~$20B equities @ ~8-9% total return

= ~$4-4.5B return on assets

 

Financed in part by

~$30B float @ ~2-3% net margin (~97-98% combined) = negative $600-900mm

~$10B in debt+prefs @ 7-8% = ~$700-800mm

= ~zero net financing cost

 

minus opex and taxes

 

~$3B net income

vs ~$20B equity 

 

= ~15% ROE

 

I think this is roughly correct, although you are ignoring non-controlling interests. Non-controlling interests run around 10% of pre-tax income, I believe.

 

But this is just for the first year, right? If Fairfax continues to trade at book, they can theoretically use all $3B in earnings to buy back shares and continue to generate a 15% ROE. But if Fairfax trades at a premium to book, it becomes more difficult to generate 15% year after year. For example, let's say Fairfax retains all $3B in net income so that equity is now $23B. With the same rate of return on investments and the same combined ratio, investments and float have to go up a lot - by around 15% each - to still generate a 15% ROE. How long can this be sustained if Fairfax trades consistently at a significant premium to book? Not very long, I suspect.

 

[Xerxes]

There was a time in the 90s, the stated goal was to get a ROE of 20%. That target was downgraded to 15% as the overall franchise grew. I don’t remember when but maybe late 90s.  
 

 

All this to say that there would a time (2030s ?) in the future that the goalpost might change to 10-12% from 15%, as the franchise grows further. 

[Munger_Disciple]

59 minutes ago, Xerxes said:

There was a time in the 90s, the stated goal was to get a ROE of 20%. That target was downgraded to 15% as the overall franchise grew. I don’t remember when but maybe late 90s.  
 

 

All this to say that there would a time (2030s ?) in the future that the goalpost might change to 10-12% from 15%, as the franchise grows further. 

 

It is almost a given that ROE will go down as the asset base increases in size. It happened to Berkshire and will happen to Fairfax. 

[MMM20]

On 11/14/2023 at 2:34 PM, treasurehunt said:

 

I think this is roughly correct, although you are ignoring non-controlling interests. Non-controlling interests run around 10% of pre-tax income, I believe.

 

But this is just for the first year, right? If Fairfax continues to trade at book, they can theoretically use all $3B in earnings to buy back shares and continue to generate a 15% ROE. But if Fairfax trades at a premium to book, it becomes more difficult to generate 15% year after year. For example, let's say Fairfax retains all $3B in net income so that equity is now $23B. With the same rate of return on investments and the same combined ratio, investments and float have to go up a lot - by around 15% each - to still generate a 15% ROE. How long can this be sustained if Fairfax trades consistently at a significant premium to book? Not very long, I suspect.

 

 

~15% ish should be sustainable for a pretty long time if we're in a more normal interest rate environment... really for as long as small and mid cap equities can move the needle. The issue for Buffett now is that a $5B home run investment in the Japanese trading companies adds what, like 100-200 bps to BRK intrinsic value? Things like that are barely worth his time so he goes elephant hunting in mega caps, right? By contrast, Eurobank and Digit could each add 1000-2000+ bps to FFH IVPS over a few years if things cut a certain way. 

 

Edited November 16, 2023 by MMM20

[UK]

https://www.businesswire.com/news/home/20231116657046/en/Farmers-Edge-Announces-Fairfax-Privatization-Offer

[keegomaster]

34 minutes ago, UK said:

https://www.businesswire.com/news/home/20231116657046/en/Farmers-Edge-Announces-Fairfax-Privatization-Offer

As per the 2022 Annual Report, Farmers Edge had a "carry value of $2.76 per share (versus market value of $0.20)". The current market value of FDGE is $0.13 before the privatization offer was announced today for $0.25. This was a ride to the bottom. Hopefully they can turn the ship around.

 

This is what they said about FDGE on the 2022 AR:

"Farmers Edge had a very challenging year in 2022. Unfortunately, the performance since the IPO in 2021 has been extremely disappointing. Vibhore Arora, former Country Leader of Amazon Canada, took over as CEO of Farmers Edge in June with the goal of growing new acres, improving execution, product delivery and the customer experience, building enterprise partnerships and a new management team and right sizing the cost structure. We are very excited about the initiatives taken already to move the business on a pathway towards positive cash flow generation. FarmCommand is a leading precision farming application and we are pleased to see that Vibhore has been successful at refining the business strategy, which is key for reducing the cash burn rate and bringing in new elements for future success." 

[Xerxes]

48 minutes ago, UK said:

https://www.businesswire.com/news/home/20231116657046/en/Farmers-Edge-Announces-Fairfax-Privatization-Offer

oh no. 
 

Prem Watsa is pulling a Bruce Flatt. 
 

Flatt is bad guy. Watsa is good guy. 
the narrative now changed. 
 

Both bad guys. 

[Xerxes]

To think of it, we all made fun of FFH calling the IPO of Farmer’ Edge “monetization”. 
 

Looks like it was indeed actually a “monetization”, we were just missing the last chapter, which would mean FFH would monetize on the spread between IPO and take out offer. 

[nwoodman]

1 hour ago, Xerxes said:

To think of it, we all made fun of FFH calling the IPO of Farmer’ Edge “monetization”. 
 

Looks like it was indeed actually a “monetization”, we were just missing the last chapter, which would mean FFH would monetize on the spread between IPO and take out offer. 

I don’t see this as a positive at all.  It provides further validity to the market’s view that Fairfax IPO’s are not to be touched with a 10’ pole. Perhaps a bit negative but I just wish they wouldn’t stuff around with these crappy positions.

[glider3834]

4 hours ago, UK said:

https://www.businesswire.com/news/home/20231116657046/en/Farmers-Edge-Announces-Fairfax-Privatization-Offer

I think there may also be a contingency, tax planning objective here, in the event the turnaround is not successful

 

 

Edited November 17, 2023 by glider3834

[StubbleJumper]

5 hours ago, nwoodman said:

I don’t see this as a positive at all.  It provides further validity to the market’s view that Fairfax IPO’s are not to be touched with a 10’ pole. Perhaps a bit negative but I just wish they wouldn’t stuff around with these crappy positions.

 

Anybody who had read the prospectus should have known not to touch Farmers' Edge with a 10' pole.  It was pure poo poo, and I recall noting that my esteem for FFH management had dropped when I read the details about just how bad the company was.

 

Now it looks like FFH wants to own 100% of that poo poo.  I am having trouble imagining how they will eventually exit the position without wasting more FFH capital on Farmers.

 

 

SJ

[MMM20]

I don’t get it either, but we are talking about one day of cash flow for this.

[longlake95]

5 hours ago, nwoodman said:

I don’t see this as a positive at all.  It provides further validity to the market’s view that Fairfax IPO’s are not to be touched with a 10’ pole. Perhaps a bit negative but I just wish they wouldn’t stuff around with these crappy positions.

Agreed, this stinks. Helps the narrative that Prem can’t help himself and continues to fiddle around with these CRAP (Can’t Realize A Profit) Co’s. Excluding the super 7 mega tech co’s, the market is trading at 16x give, or take, can’t he find solid profitable companies at reasonable prices? 
 

maybe I’m wrong! Maybe this blossoms into another home run….

 

yes, I know it’s tiny….but it’s the point…

Edited November 17, 2023 by longlake95