Fairfax 2023

[steph]

thank you Viking for sharing all your work with us. Much appreciated. 

[Viking]

3 hours ago, nwoodman said:

 

I have been thinking a lot lately that one of the magic ingredients to these styles of companies is deal flow.  Berkshire was able to use their brand and capital to backstop companies during the GFC but the phone nary rang during Covid (I know the Fed backstopped before things got truly interesting).  Perhaps Fairfax's deal flow is lower quality, and they are less discerning than Berkshire or Markel. However, they always seem to have something on the go. Often to the point of more ideas than capital i.e over leveraged.  Even their misadventures have yielded silver linings, Greece being the prime example. Anyway, back to your thoughtful post, the more partners you have turning over rocks on your behalf, the better

@nwoodman great comment. But i would take it a step further. I think Fairfax has been winnowing the vast collection of contacts they have. I think they know today who the top performers are. And the top performers are the ones getting the cash. And this has been happening for a few years. How will we know? Future results… when they keep surprising to the upside. 

[Viking]

53 minutes ago, steph said:

thank you Viking for sharing all your work with us. Much appreciated. 

@steph you are welcome. I learn so much from other posters… and what i learn usually makes its way into my future posts. This is a great community. We are very lucky right now. I have been following Fairfax for about 20 years. Only 2 other times has the set up looked as favourable as it does today: 2003 (short attack) and 2006/07 (short attack when they were sitting on giant CDS position). We all need to thank the gods for how everything with Fairfax has played out over the past 33 months. It has been a crazy wonderful ride. And the stock still trades well under 6 x 2023E earnings. Nuts.

[nwoodman]

45 minutes ago, Viking said:

@nwoodman great comment. But i would take it a step further. I think Fairfax has been winnowing the vast collection of contacts they have. I think they know today who the top performers are. And the top performers are the ones getting the cash. And this has been happening for a few years. How will we know? Future results… when they keep surprising to the upside. 

Quite possibly,  as you say we are in the process of finding out.  One thing I have tried (unsuccessfully) to handicap is their network.  I think your view of the world is more pragmatic - it’s extensive and the compounders get the capital.  

A couple of questions to you and the board 

 

1. One that intrigues me is Foran Mining. How did that investment come about?  I guess I am interested to know if it was a brokered deal (third party) or part of their network.

 

2. Also has anyone prised the lid off the Exco position?  This appears to be a cash spewing black box when energy prices are favourable.

 

https://www.kirkland.com/-/media/publications/article/2019/11/new-york-law-journal-exco-bankruptcy-restructuring.pdf?rev=334e0f6d637e47039cf954208197a785&hash=1158DA38C7721AD4AFABFA24D5DD257B

 

Normally not an energy/commodities guy but these two investments look like they are already home runs with a lot of potential upside

Edited August 2, 2023 by nwoodman

[Maxwave28]

Viking, thank you for all of your thoughtful analysis. I truly appreciate it. 

 

Newbie question for you b/c I dont understand exactly how it is working, on your earning estimate below I believe #4 represents the new IFRS discounting of reserves. If so I thought that might have been a one time adjustment but the below projects this recurring albeit at a smaller amount into the future. Was wondering if that is to capture the delta b/w the old way of reserve accounting and the new IFRS mandated way of discounting or am i totally missing it. 

 

[Xerxes]

On 7/20/2023 at 12:16 PM, SafetyinNumbers said:

Thanks for sharing! I’m really grateful to Bill for having Charlie and I on the podcast. I’m really lucky to know both of them and call them friends. 
 

Please share any feedback. It’s always appreciated! 

hi

i had a chance to listen to it. Thanks for the podcast. 
 

I liked the explanation that the hedges were to protect the insurance entities in a negative real rate environment. Often time i think folks think Prem just woke up one day and said to himself “let s make a big macro bet, shall we?”
 

I like Charlie being so super pumped about it. And the fact that he sold Costco at +35 p/e to buy FFH. 

[benchmark]

3 minutes ago, Xerxes said:

 

I like Charlie being so super pumped about it. And the fact that he sold Costco at +35 p/e to buy FFH. 

when did this happen?

[Xerxes]

8 minutes ago, benchmark said:

when did this happen?

Not munger. One of the guest on the podcast whose name is Charlie 

[benchmark]

1 hour ago, Xerxes said:

Not munger. One of the guest on the podcast whose name is Charlie 

ah, ok  

[Viking]

2 hours ago, Maxwave28 said:

Viking, thank you for all of your thoughtful analysis. I truly appreciate it. 

 

Newbie question for you b/c I dont understand exactly how it is working, on your earning estimate below I believe #4 represents the new IFRS discounting of reserves. If so I thought that might have been a one time adjustment but the below projects this recurring albeit at a smaller amount into the future. Was wondering if that is to capture the delta b/w the old way of reserve accounting and the new IFRS mandated way of discounting or am i totally missing it. 

 

@Maxwave28 your understanding is correct. When i do my updates i use the old accounting logic as much as possible. And 4.) becomes a plug kind of number. We will learn more about IFRS 17 when Fairfax reports tomorrow. My expectation is it will impact 4.) 

 

My hope is, over time, we will slowly learn what drives 4.) and how much (like changes in interest rates). So we can make educated guesses in models. Right now i feel like i am flying a little blind. I am not concerned. 

[dartmonkey]

8 hours ago, Viking said:

@steph . And the stock still trades well under 6 x 2023E earnings. Nuts.

 

Yes, there is a recent thread on this forum about historic landmarks, but maybe one landmark that we are within spitting distance of touching is price to book, which is getting close to 1. Q1 common shareholders' equity $18,663.8m (USD), market cap $18.574 as I speak (using the FRFHF quote). We will have a new book value in a few days, and it will be much higher than $18.6b (any guesses?), so we will still be trading well beneath book value, but it's heading in that direction...

[SafetyinNumbers]

46 minutes ago, dartmonkey said:

 

Yes, there is a recent thread on this forum about historic landmarks, but maybe one landmark that we are within spitting distance of touching is price to book, which is getting close to 1. Q1 common shareholders' equity $18,663.8m (USD), market cap $18.574 as I speak (using the FRFHF quote). We will have a new book value in a few days, and it will be much higher than $18.6b (any guesses?), so we will still be trading well beneath book value, but it's heading in that direction...

My guess is the stock gaps up to book value or higher on Friday and then it spend some time backing and filling during hurricane season. 

 

My book value over/under for the quarter is US$850. If I had to bet, I would take the over. 

[cwericb]

Today both the Dow and TSX were down over 300 points.

Prime hurricane season is almost upon us.

Fairfax stock has been setting new highs for several days.

 

And yet today, Fairfax stock defies the market trend and hits another new high with a substantial 1.6% ($17.29) jump* and firmly plants itself much closer to $1,100 CDN than the $1,000 mark we had been celebrating.

 

Seems people are finally starting to take notice of Fairfax. Friday may be interesting.

 

*fair volume too

Edited August 2, 2023 by cwericb

[OCLMTL]

16 hours ago, Viking said:

@steph you are welcome. I learn so much from other posters… and what i learn usually makes its way into my future posts. This is a great community. We are very lucky right now. I have been following Fairfax for about 20 years. Only 2 other times has the set up looked as favourable as it does today: 2003 (short attack) and 2006/07 (short attack when they were sitting on giant CDS position). We all need to thank the gods for how everything with Fairfax has played out over the past 33 months. It has been a crazy wonderful ride. And the stock still trades well under 6 x 2023E earnings. Nuts.

HI Viking, 

 

my first ever post here after lurking for a long time. Thanks for the incredible contribution to this website, along with other board members.

 

To your point of things being so great for 33 months and, despite this, only trading at max 6x 2023 (and 2024-2025E) earnings is beyond my comprehension. It’s a silly % of the my portfolio as is and yet, I sometimes wonder if 100% is not the appropriate number. I’ve rarely come across such a dislocation of reality vs perception in a large cap, high quality company in my entire career. I’m trying to find FFH specific (real) risks and all I see are industry/weather/cat risks that could be major headwinds… I can totally see long/short funds piling into FFH and shorting a basket of P&Cs on the other side to make an incredibly profitable trade while staying “market neutral”. Let’s see what Thursday evening brings us…

[UK]

My best guess (and hope) it is because of the very good price performance of share price of FFH recently and in a last few years, but it is really hard to understand why it is still trading today at only 1 PBV and not at some 1.2 or 1.3 already. However you look, on absolute or on relative, it does not make sense.

[nwoodman]

10 minutes ago, UK said:

My best guess (and hope) it is because of the very good price performance of share price of FFH recently and in a last few years, but it is really hard to understand why it is still trading today at only 1 PBV and not at some 1.2 or 1.3 already. However you look, on absolute or on relative, it does not make sense.

Give it time, the "market" has been a bit slow to catch on.   Totally agree with an earlier post, more than happy for it to compound at double digits for the next decade and always trade at book.  Berkshire and Markel P/B's make my fingers itchy.

[Viking]

4 hours ago, OCLMTL said:

HI Viking, 

 

my first ever post here after lurking for a long time. Thanks for the incredible contribution to this website, along with other board members.

 

To your point of things being so great for 33 months and, despite this, only trading at max 6x 2023 (and 2024-2025E) earnings is beyond my comprehension. It’s a silly % of the my portfolio as is and yet, I sometimes wonder if 100% is not the appropriate number. I’ve rarely come across such a dislocation of reality vs perception in a large cap, high quality company in my entire career. I’m trying to find FFH specific (real) risks and all I see are industry/weather/cat risks that could be major headwinds… I can totally see long/short funds piling into FFH and shorting a basket of P&Cs on the other side to make an incredibly profitable trade while staying “market neutral”. Let’s see what Thursday evening brings us…

@OCLMTL welcome to the wild side (posting). Thanks for sharing your thoughts. I agree with you that the current valuation makes no sense… even with the big move in the share price. we are learning a few things:

1.) Fairfax shares got stupid cheap. So everyone’s starting/reference point is wrong. 

2.) The phenomenal growth in the insurance companies over the past decade spiked the earnings power of the company - but low interest rates and Fairfax’s strategy of going low duration hid this increase in earnings power for a couple of years.

3.) the execution by the team at Fairfax is still being grossly under appreciated. Especially what they did with their fixed income portfolio. The spike in earnings is happening. It is sustainable. But few understand or believe. 
4.) Investment professionals are still in denial. Its almost like a badge of honour in the industry to say ‘i haven’t followed Fairfax for the past five years’ and then they follow it up with ‘oh, and don’t invest in that company… its a mess.’ Meanwhile their clients portfolios underperform. Psychology is such an important part of investing. 
 

I was talking to a family member about Fairfax tonight (they are way up on their investment) and they asked me if it was time to sell and lock in crazy big gains? I said ‘forget how much you are up for a second. You own a well run company and it is trading at 5.5 x earnings and its future prospects are very good. What do you think you should do?’  They got a blinding glimpse of the obvious - they decided to stay invested. I probably should have told them to stop looking at the stock price every day… hard when it keeps hitting fresh all time highs.

[UK]

https://www.wsj.com/articles/insurers-are-facing-more-than-one-kind-of-inflation-bb925670?mod=hp_minor_pos19

 

This has been an inflated year for natural disasters in the U.S. The number of U.S. potential billion-dollar weather and climate disasters in 2023 through June has exceeded every year tracked by that point besides 2017, with 12 such events so far, according to the National Oceanic and Atmospheric Administration’s National Centers for Environmental Information. The average from 1980 to 2022, adjusting costs for inflation, was around eight annually.

 

https://www.wsj.com/articles/home-insurers-are-charging-more-and-insuring-less-9e948113

 

“We’re still seeing the industry having an underwriting loss this year continuing out to 2025,” said Dale Porfilio, chief insurance officer at industry body the Insurance Information Institute. The institute expects that “the cycle of continuing to take rates upward is going to continue for the next two years,” Porfilio said.

...

The escalating cost of catastrophes is reflected in a steep increase in premiums for the reinsurance coverage that home-insurance companies buy to pass on some of their risk. Depending on the state regulator, those higher premiums can feed directly through to the price charged to homeowners, Fox said. His firm’s data shows reinsurance premiums were up on average 33% for June 1 renewals, which includes many Florida carriers, and 50% for renewals at the start of this year. 

The question of whether reinsurance prices will keep rising, piling more pressure on home-insurance premiums, depends a lot on what happens in the second half of this year, according to Fox. “There’s a fork in the road ahead,” he said. “If we have another major hurricane or some medium-size hurricanes or a spate of wildfires…that [reinsurance] price will go up again.”

 

Edited August 3, 2023 by UK

[UK]

WSJ:  This has been an inflated year for natural disasters in the U.S. The number of U.S. potential billion-dollar weather and climate disasters in 2023 through June has exceeded every year tracked by that point besides 2017, with 12 such events so far, according to the National Oceanic and Atmospheric Administration’s National Centers for Environmental Information. The average from 1980 to 2022, adjusting costs for inflation, was around eight annually.

 

FFH: The consolidated combined ratio of the property and casualty insurance and reinsurance operations was 93.9%, producing an underwriting profit of $337.5 million, compared to a combined ratio of 94.1% and an underwriting profit of $301.7 million in 2022, driven by continued growth in business volumes (net insurance revenue increased by 6.2%), prudent expense management and decreased catastrophe losses of $134.8 million or 2.4 combined ratio points in the quarter.

[Haryana]

 

Brett Horn strikes again!

 

https://www.morningstar.com/stocks/xtse/ffh/quote

 

Fairfax Financial Earnings: Strong Underwriting Margins Partially Offset by Investment Losses

 

Senior Equity Analyst | Brett Horn | Aug 4, 2023

Fairfax Financial reported a solid second quarter with relatively strong underwriting margins. However, this was partially offset by some investment losses. While the second quarter was weaker than the first quarter, Fairfax is having a good year so far, with book value per share up 11% since year-end, adjusted for dividends. We will maintain our CAD 790 fair value estimate for the no-moat company and see the shares as overvalued at the moment.

 

[Parsad]

11 minutes ago, Haryana said:

 

Brett Horn strikes again!

 

https://www.morningstar.com/stocks/xtse/ffh/quote

 

Fairfax Financial Earnings: Strong Underwriting Margins Partially Offset by Investment Losses

 

Senior Equity Analyst | Brett Horn | Aug 4, 2023

Fairfax Financial reported a solid second quarter with relatively strong underwriting margins. However, this was partially offset by some investment losses. While the second quarter was weaker than the first quarter, Fairfax is having a good year so far, with book value per share up 11% since year-end, adjusted for dividends. We will maintain our CAD 790 fair value estimate for the no-moat company and see the shares as overvalued at the moment.

 

 

It's because of guys like this that make the markets so efficient!  Cheers!

[Daphne]

Horn likely still belongs to the old shorting club. Still trying to recoup his losses.

[Parsad]

Every time any investment goes up, people should just start using the phrase, "Horned it!"

 

Watsa "horned it" this quarter!  Buffett "horned it" this quarter!  Zuckerberg "horned it" this quarter!  

 

Man, I just "horned it" with my FFH the last two years!

 

Cheers! 

[StubbleJumper]

38 minutes ago, Daphne said:

Horn likely still belongs to the old shorting club. Still trying to recoup his losses.

 

No.  He's likely not part of an old shorting club, but more likely an analyst who is trying to intelligently publish opinions on 40 or 50 different stocks and cannot do a credible job of any of them.  The investment losses that preoccupy him are a nothing as they are mainly unrealized losses on bonds that will be held to maturity, and thus will reverse over the next 2 or 3 years, irrespective of what happens to interest rates over that time.  The other thing to ignore are the IFRS 17 discounting issues as they too will reverse over a few years (there is no economic significance to them).  And then the Farmers Edge charge is the third thing to ignore as that reflects a bad decision made five years ago or so.  None of those things make a whit of difference about the economic value of the company on a going-forward basis, but I understand how an analyst who cannot invest adequate time in the company might view those items as significant.

 

 

SJ

[Viking]

4 hours ago, StubbleJumper said:

 

No.  He's likely not part of an old shorting club, but more likely an analyst who is trying to intelligently publish opinions on 40 or 50 different stocks and cannot do a credible job of any of them.  The investment losses that preoccupy him are a nothing as they are mainly unrealized losses on bonds that will be held to maturity, and thus will reverse over the next 2 or 3 years, irrespective of what happens to interest rates over that time.  The other thing to ignore are the IFRS 17 discounting issues as they too will reverse over a few years (there is no economic significance to them).  And then the Farmers Edge charge is the third thing to ignore as that reflects a bad decision made five years ago or so.  None of those things make a whit of difference about the economic value of the company on a going-forward basis, but I understand how an analyst who cannot invest adequate time in the company might view those items as significant.

 

SJ

@StubbleJumper i agree with everything you said. There are a few analysts out there who clearly do not follow Fairfax all that closely. But they are at least smart enough to raise their price targets over time (to reflect improving quality of earnings). The problem with Morningstar is they are sticking with C$790/share fair value estimate for the stock. That makes them look like idiots. It reflects badly on Morningstar as a company. RBC uses Morningstar as part of its research coverage offered to investors. So it also makes RBC look foolish, given Fairfax is a very large Canadian company. 
 

The solution is for Morningstar to end coverage of Fairfax. But to @Parsad ‘s comment, some investors probably make decisions based on what companies like Morningstar have to say - and that just creates fat pitches for other investors. So i guess i should welcome their idiocy.

Edited August 6, 2023 by Viking