Fairfax 2023

[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

[StubbleJumper]

25 minutes ago, MMM20 said:

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

 

The issue in my mind is not the few million bucks that it'll cost to buy out the minority holders.  The bigger question is how long will it take to find a chump to buy the entire company from FFH, and how many capital injections will Farmers require during those years that FFH is seeking a chump?  It is quite possible that the capital injections could be much larger than the take private amount...

 

 

SJ

[MMM20]

1 hour ago, StubbleJumper said:

 

The issue in my mind is not the few million bucks that it'll cost to buy out the minority holders.  The bigger question is how long will it take to find a chump to buy the entire company from FFH, and how many capital injections will Farmers require during those years that FFH is seeking a chump?  It is quite possible that the capital injections could be much larger than the take private amount...

 

 

SJ

 

Yeah it doesn't make sense to me either, but I always have these sorts of tensions with these "someone else's fund" sort of investments. I want them doing things that I wouldn't do myself, eg Fairfax with Digit, Berkshire with Apple, Exor with Ferrari/Stellantis, and all technology/biotech venture capital for that matter. I guess the question is just whether there is an ethical issue - if the critics have a valid point that they're taking advantage the public with overhyped expensive IPOs and/or minority shareholders with take privates at obviously depressed pricing. Why not just inject capital and take the public for the ride to redemption and burnish your reputation that way? Maybe because it's just too expensive to be a tiny public company nowadays?

 

There is no way I would even take a look at Farmers Edge personally... but that's part of why I own Fairfax. I just want to know I'm going to be treated fairly as a partner and that they aren't bailing out their friends. So if nothing else, maybe this sort of thing just puts a lid on multiple expansion?

 

Edited November 17, 2023 by MMM20

[Munger_Disciple]

More than anything else, I worry about the lack of focus and discipline on the part of management to keep doubling down on shitcos. It is almost like they keep falling for sunk cost fallacy without learning. 

Edited November 17, 2023 by Munger_Disciple

[bearprowler6]

Just when you thought that a buyout of Farmer's Edge represents a new low; this gets reported:

 

https://finance.yahoo.com/news/prem-watsa-bolsters-stake-blackberry-200329382.html

 

Nothing has changed----same old Fairfax.....

 

Seriously, Farmers Edge and more Blackberry??

[Viking]

8 hours ago, glider3834 said:

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

I agree. And I do not understand all the anger with the posts on Farmers Edge. Can anyone explain to me what Fairfax is doing and more importantly why they are doing it? What are the financial impacts? Clearly more information is needed to properly assess this announcement. My initial read is this is a nothing burger. But i remain open minded.
 

Yes, Farmers Edge was a terrible investment. It has been clear for at least a year that the end of this investment is near. Sayonara. 

[Crip1]

17 minutes ago, bearprowler6 said:

Just when you thought that a buyout of Farmer's Edge represents a new low; this gets reported:

 

https://finance.yahoo.com/news/prem-watsa-bolsters-stake-blackberry-200329382.html

 

Nothing has changed----same old Fairfax.....

 

Seriously, Farmers Edge and more Blackberry??

OK, let's tap the brakes a little here. Yes, BB was a terrible mistake...it happens. But I think "Nothing has changed----same old Fairfax..." is a dramatic overstatement. The headline does not look good but this latest addition is for less than a half million dollars. That's little more than a rounding error for a company earning billions. Peculiar purchase? Yes, but not nearly enough to remotely move the needle.

 

-Crip

[Viking]

16 minutes ago, bearprowler6 said:

Just when you thought that a buyout of Farmer's Edge represents a new low; this gets reported:

 

https://finance.yahoo.com/news/prem-watsa-bolsters-stake-blackberry-200329382.html

 

Nothing has changed----same old Fairfax.....

 

Seriously, Farmers Edge and more Blackberry??

@bearprowler6 your comment surprised me. The size of the purchase was very small. The ‘report’ calls it a sizeable addition? It added 0.003% to Fairfax’s position. It was a $450,000 purchase - tiny in size.
 

Regardless, Blackberry is also in the process of being sold. Fairfax understands the company better than most. It probably IS good value at $3.52/share. Will Fairfax play around with their position size pre-sale? Perhaps.

 

Like Farmers Edge, IMHO we need more information before we rush to judgement. 

—————

“On November 13, 2023, Prem Watsa (Trades, Portfolio), through Fairfax Financial Holdings, made a notable addition to its investment in BlackBerry Ltd (NYSE:BB). The transaction involved the acquisition of 129,000 shares at a price of $3.52 per share, increasing the total holdings to 46,853,700 shares. This move had a 0.03% impact on the portfolio, adjusting the position to 10.77% and marking a significant vote of confidence in the company's prospects.”

[Xerxes]

BB additional common stock purchase could be close to the end of Q3, meaning that the 13F didn’t capture the rest of it, which could be in Q4. In any case, I am speculating. That said it is peculiar. We don’t have all the facts. Same for Farmer’ Edge. 
 

 

That said the one recent piece of news that I do find interesting is this piece from The Globe that Viking posted. I realize that it says “in personal capacity”, but I just wonder if a coal side project is a best use of one’ bandwidth.
 

I am not sure why Pierre Lassonde find so mystifying. This is Glencore we are taking about with all of the commitment it is making above and beyond purchase price. Not some consortium of three amigoes wanting to get into coal business as a side gig. 

 

[bearprowler6]

4 minutes ago, Crip1 said:

OK, let's tap the brakes a little here. Yes, BB was a terrible mistake...it happens. But I think "Nothing has changed----same old Fairfax..." is a dramatic overstatement. The headline does not look good but this latest addition is for less than a half million dollars. That's little more than a rounding error for a company earning billions. Peculiar purchase? Yes, but not nearly enough to remotely move the needle.

 

-Crip

Crip,

 

Yes my comments were somewhat of an overstatement however I made them for a reason. 

 

Has Fairfax really changed? Yes they have locked in higher interest and dividends for the next 3-4 years. That is as much a function of the higher interest rate environment we are in as it is a statement on Fairfax's prowess. Bradstreet has always been great so really no change.

 

Better underwriting resulting in a very good combined ratio. Insurance underwriting has been very solid for several years now so in my view they are simply benefiting from the recent hard market without any real change on their part.

 

The concern has been and still is on the equity side of things. Some good signs for sure but then we wake up to the news of Farmers Edge buyout and an additional purchase of Blackberry shares. Its not the fact that both are small amounts---yes the additional Blackberry purchase was less than $500K. its the fact that these purchases are still being made at all that justifies my statement "nothing has changed----same old Fairfax". 

 

Let me ask you....as you manage your own portfolio....have you not attempted over time to eliminate any mistakes by selling them off and improving the overall quality of your portfolio by doing so? I know that's what I have strived to do. Everyone makes mistakes....some big some small. Admitting those mistakes and moving on from them after a sufficient time period is the key. Fairfax/Prem struggle to do this?

 

Several members of this board express their anger at the analysts who don't seem to understand the "new" Fairfax. Maybe those analysts see something those of us to have been around Fairfax for decades do not or at least are unwilling to admit?

 

BP6