Fairfax 2023

[glider3834]

14 hours ago, TwoCitiesCapital said:

 

The answer to your first question is yes, their bonds would gain in value. Potentially moving to unrealized gains even if they are far enough from maturity to trade at premiums. All the unrealized losses will be made back by Fairfax either by holding then bonds to their maturity OR rates dropping. 

 

Your second question the answer is 'it depends'. It's possible for 1-2 years treasuries to do better than 10-years in a rate cutting scenario, but highly unlikely.  

 

The duration of a 1 year bond is slightly less then 1. You'd expect that bond to gains slightly less than 1% for each 1% the Fed cuts. At this point in time your max gain on those 1-years bonds is 4-5% of we go to 0% on front-end rates. 

 

A 2-year bond sports a duration slight less than 2. So the same 1% decrease in rates results in ~2% return. 

 

A 10-year bond will have a duration closer to 8. If 10-year yields fall by 1%, you'd gain ~8.1% on the bond.

 

So for the 1-year bond to outperform the 10-year, you'd have to believe that a 1.00% cut on the front-end only results in a ~0.125% reduction in rates on the long end. It's possible, but not likely. More likely is 10-years go down by 0.5-0.75%. You make 1% in the one year bond, 2% in the two year bond, and 4-6% on the 10-year. 

cheers!

[glider3834]

Brit are reducing their exposure to cat intensive areas of US property - around 50% of Fairfax's cat losses from hurricanes Ian (2022) and Ida (2021) were at Brit - so I view this as a positive move.

 

Edited February 19, 2023 by glider3834

[Parsad]

On 2/18/2023 at 5:07 AM, gfp said:

So from the conference call transcript I have Prem saying this:

 

And in 2022, our interest and dividend income went up significantly, and they're running today at $1.5 billion, and we are slowly increasing duration to 2, which means that '23, $1.5 billion, '24, $1.5 billion. That's probably more than we've ever had in the past, interest and dividend income of that amount.

 

So it sounds like this is the plan - slowly move that average from 1.5 -> 2 years.  Too slow for you guys I guess, but I have no idea why so many people are assuming that the 10yr peaked at 4.3% back in October.  That was the rate priced in when "everyone" was sure we were having a recession imminently.  The US 5Y peaked at 4.4% back in October and is already back to 4.03% looking like it wants to go higher.  The US 3Y peaked at 4.65%, October, and it already back to 4.31%, again looking like it (the rate) is going higher.  There is no reason to assume they have already missed some great opportunity to lock in low 4's for a long time.

 

I think what they are doing is smart and they have shown that managing this part of the portfolio is one of their greatest strengths.  I'm not disappointed at all.  The sweet spot for where I would park my money (if I had any not invested in equities) would have a 5-handle on it.  I'll bet we see the same avg. duration posture when Berkshire reports.  

 

+1!  On the fixed income side, they are one of the best in the world...short-term, mid-term, long-term performance.  There isn't a period where they have underperformed.  In fact, FFH shareholders should feel more comfortable on their fixed income investing than their equity investing record.  

 

With rates rising as they have, we know there will be significant corporate failures and opportunity for them to do what they do best...distressed debt investing.  So they've guaranteed the bottom side income for the next two years...and they have enormous upside potential if markets (both fixed and equity) deteriorate.  

 

After such a banner two years, and probably another banner 2023, I can't believe people on here are second guessing their bond duration.  Let them work people!  Cheers!

[Parsad]

On 2/18/2023 at 6:17 AM, StevieV said:

 

I like anything with a high probability of double-digit returns over the next few years.  Fairfax certainly still looks like that here.  I don't know about 1.5x book, but $1,000 USD over a few years, that seems pretty high-probability.

 

Fairfax's 2022 and '23 YTD outperformance has been nice.

 

+1!  I think they'll hit 15% ROE for the next few years if they've truly let go of shorting and macro bets.  If they just focus on what they are good at and know, they will hit their goals.  

 

I've always said $1K CDN before the end of 2023.  I think they'll hit the $1K USD mark after a banner 2023...so early 2024.  If it happens sooner...great!  But I can see an easy $750 USD book by the end of 2023...give it a 1.25 times multiple and you are close to $1K USD in 2024. 

 

Cheers! 

[Xerxes]

The highlight of the conference call (which I listened yesterday) was that for the first time Prem looked at FFH's valuation from an earning multiples point of view (notwithstanding that he is choosing some elevated earning figure in his P/E)

 

On IFRS 17, I didnt understand anything

On future capital allocation, this sounds more and more like an oil & gas company that at some point it is done in investing in drill bits, labor, h/w, assets, and when the earning start to gushes out, it will repurchase its own shares (at all time high in absolute terms but at a low multiple)

 

That said, I guess the SIB in late 2021 and the TRS will help balance out future repurchases at high dollar terms.

 

---

Prem Watsa

I'll take a crack on it, Mark, and then pass it on to Peter. So share buybacks, we just think is the right way to do -- go forward for our shareholders. We bought 2 million shares in 2021, and we continue to buy an normal course issuer bit. And so point number one, I've said many times, financial position, financial strength. We're not going to buy back stock at the expense of our financial position. You'd expect me to say that because on a long-term basis that you have to have financial strength and we have that.

 

Number two is our insurance business. I mean we've expanded our insurance business huge, doubled our premium and become one of the world's largest insurance companies, property casualty companies with excellent underwriting and excellent reserving and a very diversified base so that you have $1.3 billion of cat losses and you still have 96% combined ratio, a 95% combined ratio last year with, as I said, very small result redundancies taken. So that's a very good position to be in. But as the insurance cycle changes and flattens out some, Peter?

 

Peter Clarke

Yeah. No, just to add, if we look back over the last three years, as Prem said, we've grown significantly. And we've generally funded the capital required to grow through internal means through our operating earnings. And there'll be a time when growth will slow. And the expectation is when growth slows, and our earnings will then produce dividends to Fairfax. And then we can look at all the options available and buying back our own shares, especially at these prices would be something -- would be of great interest to us

 

......

 

And -- but all our companies are doing very well and our expense ratios have come down. The reserving is excellent. And -- but we do see growth in the future. We do see growth. And if growth slows down, as it will some time, then we expect, as Peter said, to look at continuing to buy back stock at significant amounts.

 

Jaeme Gloyn

Okay. So if I understand, I guess, the view near term is that, that growth rate will reaccelerate, or there's a view that it should reaccelerate and that you'll sort of maintain. And if it doesn't reaccelerate, you'll maintain underwriting leverage through share buybacks? Is that...

 

Prem Watsa

That's the exact way, right? We don't forecast, right? We don't forecast it. We take it as it comes, and it's a very decentralized operation. And we can tell you that the rating environment is good. I can tell you, we'll expand at 15% or 10%, didn't tell you last year, didn't tell you two years ago. We just look at what our companies face and doing the right thing for our shareholders long term.

[Parsad]

3 hours ago, Xerxes said:

The highlight of the conference call (which I listened yesterday) was that for the first time Prem looked at FFH's valuation from an earning multiples point of view (notwithstanding that he is choosing some elevated earning figure in his P/E)

 

On IFRS 17, I didnt understand anything

On future capital allocation, this sounds more and more like an oil & gas company that at some point it is done in investing in drill bits, labor, h/w, assets, and when the earning start to gushes out, it will repurchase its own shares (at all time high in absolute terms but at a low multiple)

 

That said, I guess the SIB in late 2021 and the TRS will help balance out future repurchases at high dollar terms.

 

---

Prem Watsa

I'll take a crack on it, Mark, and then pass it on to Peter. So share buybacks, we just think is the right way to do -- go forward for our shareholders. We bought 2 million shares in 2021, and we continue to buy an normal course issuer bit. And so point number one, I've said many times, financial position, financial strength. We're not going to buy back stock at the expense of our financial position. You'd expect me to say that because on a long-term basis that you have to have financial strength and we have that.

 

Number two is our insurance business. I mean we've expanded our insurance business huge, doubled our premium and become one of the world's largest insurance companies, property casualty companies with excellent underwriting and excellent reserving and a very diversified base so that you have $1.3 billion of cat losses and you still have 96% combined ratio, a 95% combined ratio last year with, as I said, very small result redundancies taken. So that's a very good position to be in. But as the insurance cycle changes and flattens out some, Peter?

 

Peter Clarke

Yeah. No, just to add, if we look back over the last three years, as Prem said, we've grown significantly. And we've generally funded the capital required to grow through internal means through our operating earnings. And there'll be a time when growth will slow. And the expectation is when growth slows, and our earnings will then produce dividends to Fairfax. And then we can look at all the options available and buying back our own shares, especially at these prices would be something -- would be of great interest to us

 

......

 

And -- but all our companies are doing very well and our expense ratios have come down. The reserving is excellent. And -- but we do see growth in the future. We do see growth. And if growth slows down, as it will some time, then we expect, as Peter said, to look at continuing to buy back stock at significant amounts.

 

Jaeme Gloyn

Okay. So if I understand, I guess, the view near term is that, that growth rate will reaccelerate, or there's a view that it should reaccelerate and that you'll sort of maintain. And if it doesn't reaccelerate, you'll maintain underwriting leverage through share buybacks? Is that...

 

Prem Watsa

That's the exact way, right? We don't forecast, right? We don't forecast it. We take it as it comes, and it's a very decentralized operation. And we can tell you that the rating environment is good. I can tell you, we'll expand at 15% or 10%, didn't tell you last year, didn't tell you two years ago. We just look at what our companies face and doing the right thing for our shareholders long term.

 

Actually, the one thing I would like to see is continued upgrades of Fairfax's credit rating.  It may not get to AA+ like Berkshire, but I think it's time we got to the A's like Markel Corp instead of BBB.  Cheers!

[investmd]

On recent Conference call did Watsa shed any light on what FFH is doing with profits from sale of pet insurance business in 2022? 

[MMM20]

On 2/19/2023 at 9:11 PM, Xerxes said:

The highlight of the conference call (which I listened yesterday) was that for the first time Prem looked at FFH's valuation from an earning multiples point of view (notwithstanding that he is choosing some elevated earning figure in his P/E)

So then what is the right earnings figure?

Annual operating profit now =

Fixed income ~$1.5B (@ ~3-5% yield)

Insurance ~$1B (@ ~97% combined)

Equities ~$1-1.5B (@ ~6-8% total return)

Minus corporate overhead

= ~$3-4B operating profit 

Minus interest and taxes 

= $2.3B+ net profit

= $100+ earnings per share

 

How is he wrong?

 

Edited February 21, 2023 by MMM20

[Xerxes]

^^^
I would go back to SJ comment about “normalized earning”. Prem himself indicated that this elevated earning will be going to be for a few years. 
 

 

with these two comments in mind is the 650/100 is really cheap if numerator continues to soar and the denominator peaks out couple of years from now 

[Munger_Disciple]

4 hours ago, MMM20 said:

So then what is the right earnings figure?

Normalized operating profit now =

Fixed income ~$1.5B (@ ~3-5% yield)

Insurance ~$1B (@ ~97% combined)

Equities ~$1-1.5B (@ ~6-8% total return)

= ~$3.5-4B operating profit 

Minus interest and taxes 

= $2.3B+ net profit

= $100+ earnings per share

 

How is he wrong?

 

 

I haven't spent a lot of time valuing Fairfax but it seems to me that assuming 97% CR is part of "normalized earnings" is quite aggressive. Even at Berkshire, Buffett guides us to assume 100% CR for their world leading insurance businesses. Fairfax's insurance business is much improved (yes!) but I highly doubt it is as good as Berkshire's. And as most of us realize, the "normalized" return on bonds depends a lot on medium to long-term treasury bond yields which are somewhat unknown so prudence dictates that we should be somewhat conservative in estimating the LT "normalized" bond returns. 

Edited February 20, 2023 by Munger_Disciple

[MMM20]

20 hours ago, Munger_Disciple said:

 

I haven't spent a lot of time valuing Fairfax but it seems to me that assuming 97% CR is part of "normalized earnings" is quite aggressive. Even at Berkshire, Buffett guides us to assume 100% CR for their world leading insurance businesses. Fairfax's insurance business is much improved (yes!) but I highly doubt it is as good as Berkshire's. And as most of us realize, the "normalized" return on bonds depends a lot on medium to long-term treasury bond yields which are somewhat unknown so prudence dictates that we should be somewhat conservative in estimating the LT "normalized" bond returns. 

 

Alright, I get that a lot of things can go wrong. Just let me walk through another scenario. 
 

I defer to the rates experts here but 3-5% seems conservative to me. Money markets now at 4.5%. Given FFH’s extremely strong long term track record, shouldnt we expect a continuation of very good judgment on duration and spreads? We might very well end up with equity-like 6%+ returns on the fixed income side if they make a few good calls as they've done for decades.

And would you be so surprised if the public+private equity portfolio compounds at 10% over the next decade? Research Affilates has nominal 10-year expected returns for a global equity portfolio at about 10%, with EAFE and EM low teens.

 

Ok, let’s assume they just breakeven on the insurance side and no more growth for a decade. Still = 0% borrowing cost on tens of billions. 
 

Year 10 = ~$60B cash+fixed income + ~$40B equities, and ~20mm share count (maybe much lower), minus real liabilities and capitalized overhead, w/ no credit for insurance value = NAV
 

~$3,500 NAV in 10 years. High teens IRR / 5x MOIC. Power of their now huge float and good execution w/o some big bad macro overlay. 

Prem goes out on top in his 80s. Or goes full Buffett/Munger.

 

I dunno.
 

Edited February 21, 2023 by MMM20

[Viking]

I have not updated my models yet (family reunion), but given Fairfax’s Q4 results, here are some quick thoughts:

- US$120/share in earnings for 2023 might be the new normalized number.

- BV Dec 30, 2022 = $658.
- est BV Dec 30, 2023 = $768 (deducting $10 dividend payment)

- Stock is trading today at $693.

 

So stock is trading at:

- PE < 6 x 2023 earnings

- P/BV = 1.05 x Dec 30, 2022BV

- P/BV = 0.90 x est Dec 30, 2023BV

 

What about 2024? Another $120/share in earnings look likely.

 

What does this tell me? Fairfax continues to be dirt cheap. Not as cheap as it was 4 months ago. But dirt cheap given the near term earnings visibility (2023 & 2024). Or compared to other P&C insurers. Or compared to the overall market. 
 

What about 2025 and beyond? Given what i have seen from Fairfax over the past 5 years I think they are going to continue to deliver good to very good results. What will the puts and takes be? No idea. So i will follow the company and update my thesis as new information becomes available. 

 

What we are learning is just how stupid cheap Fairfax got multiple times over the past 2 years. Ambridge Partners sale = $275 million gain. The TRS on FFH shares continues to print money (up $250 million YTD). Those two items alone = $525 million in gains = $22/share pre-tax. My guess is we will see FFH buying back more shares. They have billions in operating earnings rolling in that they are actively redeploying - those significant, new investments will start their compounding magic. Fairfax has so may levers to pull to compound shareholder value - it is unlike any period over the past 10-12 years.

 

The ‘narrative’ around Fairfax is also shifting. Delivering exceptional results year after year (as they have done recently) will do that. 
 

Growing earnings + growing market multiple + lower share count = spiking stock price. Fairfax is firing on all three cylinders… and the party is likely just getting started. 

Edited February 20, 2023 by Viking

[glider3834]

5 hours ago, Munger_Disciple said:

 

I haven't spent a lot of time valuing Fairfax but it seems to me that assuming 97% CR is part of "normalized earnings" is quite aggressive. Even at Berkshire, Buffett guides us to assume 100% CR for their world leading insurance businesses. Fairfax's insurance business is much improved (yes!) but I highly doubt it is as good as Berkshire's. And as most of us realize, the "normalized" return on bonds depends a lot on medium to long-term treasury bond yields which are somewhat unknown so prudence dictates that we should be somewhat conservative in estimating the LT "normalized" bond returns. 

If you look at Berkshire's insurance business versus Fairfax I think there are some big differences - by product line &  by growth profile- with geography (this is a little harder to determine so feel free to chime in)- but overall not a straight apples/apples comparison.

 

Looking at Berkshire 2021 premium written

 

Reinsurance - global - 29%

Insurance

- private passenger auto (US)/Geico - primary- 54% & 

- Commercial (primary & specialty) - 17%

 

So I would say the rate/growth dynamics in the US private passenger auto insurance markets in US and the reinsurance markets globally are significant drivers for Berkshire's underwriting results.

 

For Fairfax, the GPW split is around 76% insurance and 24% reinsurance.

 

So Fairfax's reinsurance business appears smaller as a percentage of Fairfax's total written premium versus Berkshires.

 

Also Fairfax has grown significantly in E&S/specialty - according to S&P, around 31-33% of Fairfax's total direct premiums written is E&S versus 7.5% to 9% for Berkshire before taking into account Alleghany acquisition which will lift this percentage.

 

Then you have the premium growth profile - Berkshire is a lot larger, more mature - its growing GPW at a slower rate than Fairfax - the underwriting profit growth is a function of both combined ratio & the rate of net earned premium growth.

 

 

 

 

 

 

 

Edited February 21, 2023 by glider3834

[Viking]

7 hours ago, Munger_Disciple said:

 

I haven't spent a lot of time valuing Fairfax but it seems to me that assuming 97% CR is part of "normalized earnings" is quite aggressive. Even at Berkshire, Buffett guides us to assume 100% CR for their world leading insurance businesses. Fairfax's insurance business is much improved (yes!) but I highly doubt it is as good as Berkshire's. And as most of us realize, the "normalized" return on bonds depends a lot on medium to long-term treasury bond yields which are somewhat unknown so prudence dictates that we should be somewhat conservative in estimating the LT "normalized" bond returns. 

@Munger_Disciple when did Berkshire guide that Berk shareholders should assume a 100CR for their business? In a low/zero interest rate world (which we had for much of the last decade) that number is nuts. 
 

I don’t see why 95 is not a good/realistic target for Fairfax over the next couple of years. It was 95 in 2021 and 94.7 in 2022. My baseline for 2023 is 94.5. Why? We have a just had a 3+ years hard market. And 2023 should be decent. Absent the sudden emergence of a very soft market, my guess is underwriting results should be good. The risk, of course, is a record year for catastrophes. Always a possibility. But the opposite is also possible - a benign year for catastrophes. If that were to happen the CR would likely be in the low 90’s. 
—————

Given average duration of bond portfolios (4 years or so), it will take a few years for insurance companies to realize the benefit of higher interest rates. This really is a big benefit for Fairfax - one that will benefit them for a couple of years. This will likely extend the hard market a little longer.

Edited February 21, 2023 by Viking

[Munger_Disciple]

1 hour ago, Viking said:

@Munger_Disciple when did Berkshire guide that Berk shareholders should assume a 100CR for their business? In a low/zero interest rate world (which we had for much of the last decade) that number is nuts. 
 

 

@Viking Thanks for the great posts about Fairfax & I hope all is well with you & family.

 

Buffett always talked about float being "costless" (which can be interpreted as 100% CR) to Berkshire in his reports. Here is Warren:

 

2021 AR: One final thought about insurance: I believe that it is likely – but far from assured – that Berkshire’s float can be maintained without our incurring a long-term underwriting loss. I am certain, however, that there will be some years when we experience such losses, perhaps involving very large sums.

 

2020 AR: The massive sum held by Berkshire is likely to remain near its present level for many years and, on a cumulative basis, has been costless to us. That happy result, of course, could change – but, over time, I like our odds.

 

2016 AR: If our revolving float is both costless and long-enduring, which I believe it will be, the true value of this liability is dramatically less than the accounting liability. 

 

I also recall Buffett saying very similar things during the annual meetings. Berkshire actually earned a very modest underwriting profit over the years but their "goal" is to write business so that float costs them 0%.

 

I do agree with you that Fairfax's bond portfolio is well managed and they are currently benefiting from staying very short in duration. Whether the current bond earnings can be thought of as "normalized", I am not sure as it is hard to predict the trajectory of interest rates. If one is in "higher for longer" camp, then of course yes at least for the next 5 years. 

 

[bluedevil]

I was reading Tom Gaynor's annual letter to Markel shareholders and noted his description of how to value Markel, which is similar to how I have also seen people value Berkshire:

 

One part of the assessment is extremely straightforward. If you assume that we will continue to be profitable in our insurance operations, and we do not shrink, the total value of the investment portfolio accrues to the shareholders. The earnings from our investment portfolio are like fruit from a fruit tree. If you were valuing a fruit tree, the value is the present value of the fruit the tree will produce over time. Same thing with our investment portfolio.  As such, we simply take the total value of our investment portfolio and subtract out all debt, to get an indication of the value of the balance sheet part of Markel.

 

Another important part of estimating an indication of the value of Markel stems from the earnings power of our Insurance and Markel Ventures operations. We take the normal, annualized earnings from those operations and multiply that by a consistent and reasonable multiple year-by-year. That process provides an indication of the total value of Markel’s income statement. Then we add those two parts together to determine our own sense of what each share of Markel is worth.  

 

Do others here see the balance sheet description as a valid way to measure the value of an insurer that over the long term has demonstrated the ability to underwrite profitably?

 

It seems reasonable to think that Fairfax will be able to underwrite insurance at 100CR over the very long term.  Doesn't that mean -- that if you make that one assumption -- that Fairfax should be valued at a market cap of something over $40 billion, versus its market cap today of about $16 billion?  i believe the investment portfolio is over $50 billion, and debt is about $6 billion.  Curious on people's thoughts on this.  

 

 

 

[glider3834]

51 minutes ago, Munger_Disciple said:

 

@Viking Thanks for the great posts about Fairfax & I hope all is well with you & family.

 

Buffett always talked about float being "costless" (which can be interpreted as 100% CR) to Berkshire in his reports. Here is Warren:

 

2021 AR: One final thought about insurance: I believe that it is likely – but far from assured – that Berkshire’s float can be maintained without our incurring a long-term underwriting loss. I am certain, however, that there will be some years when we experience such losses, perhaps involving very large sums.

 

2020 AR: The massive sum held by Berkshire is likely to remain near its present level for many years and, on a cumulative basis, has been costless to us. That happy result, of course, could change – but, over time, I like our odds.

 

2016 AR: If our revolving float is both costless and long-enduring, which I believe it will be, the true value of this liability is dramatically less than the accounting liability. 

 

I also recall Buffett saying very similar things during the annual meetings. Berkshire actually earned a very modest underwriting profit over the years but their "goal" is to write business so that float costs them 0%.

 

I do agree with you that Fairfax's bond portfolio is well managed and they are currently benefiting from staying very short in duration. Whether the current bond earnings can be thought of as "normalized", I am not sure as it is hard to predict the trajectory of interest rates. If one is in "higher for longer" camp, then of course yes at least for the next 5 years. 

 

 

I would be curious if anyone has crunched the numbers on Berkshire's actual underwriting record since inception? 
 

I found this in 2021 annual report

 

 

 

 

 

[Munger_Disciple]

11 minutes ago, glider3834 said:

 

I would be curious if anyone has crunched the numbers on Berkshire's actual underwriting record since inception? 
 

 

I haven't but Buffett said Berkshire achieved a "modest" total underwriting profit over the years. I take this to mean that somewhat small but positive cumulative profit over the 55 years. 

From 2021 AR: So far, this float has cost us less than nothing. Though we have experienced a number of years when insurance losses combined with operating expenses exceeded premiums, overall we have earned a modest 55-year profit from the underwriting activities that generated our float. 

Edited February 21, 2023 by Munger_Disciple

[gfp]

Personnel changes - Brian Young, CEO of Odyssey will share oversight with Andy Barnard over all of Fairfax's insurance companies:

https://www.fairfax.ca/news/press-releases/press-release-details/2023/Fairfax-Financial-Holdings-Personnel-Announcements/default.aspx

[MMM20]

13 hours ago, bluedevil said:

I was reading Tom Gaynor's annual letter to Markel shareholders and noted his description of how to value Markel, which is similar to how I have also seen people value Berkshire:

 

One part of the assessment is extremely straightforward. If you assume that we will continue to be profitable in our insurance operations, and we do not shrink, the total value of the investment portfolio accrues to the shareholders. The earnings from our investment portfolio are like fruit from a fruit tree. If you were valuing a fruit tree, the value is the present value of the fruit the tree will produce over time. Same thing with our investment portfolio.  As such, we simply take the total value of our investment portfolio and subtract out all debt, to get an indication of the value of the balance sheet part of Markel.

 

Another important part of estimating an indication of the value of Markel stems from the earnings power of our Insurance and Markel Ventures operations. We take the normal, annualized earnings from those operations and multiply that by a consistent and reasonable multiple year-by-year. That process provides an indication of the total value of Markel’s income statement. Then we add those two parts together to determine our own sense of what each share of Markel is worth.  

 

Do others here see the balance sheet description as a valid way to measure the value of an insurer that over the long term has demonstrated the ability to underwrite profitably?

 

It seems reasonable to think that Fairfax will be able to underwrite insurance at 100CR over the very long term.  Doesn't that mean -- that if you make that one assumption -- that Fairfax should be valued at a market cap of something over $40 billion, versus its market cap today of about $16 billion?  i believe the investment portfolio is over $50 billion, and debt is about $6 billion.  Curious on people's thoughts on this.  

 

 

 

 

Couldn't agree more. I keep testing the thesis and coming back to roughly your same conclusion.

 

Fairfax's acquisitions and recent organic growth have set them up with huge float vs. the size of their investment portfolio. That didn't matter much when basically anyone could borrow at ~0. Now it's back to being a massive advantage, and Fairfax has relatively more of it than anyone else. Run the numbers and you'll see that with a -1% to 0% cost of financing (99-100% combined ratio) on what amounts to roughly half of their investment portfolio, we should only need market-ish returns on their fixed income and equities to make ~20% long term returns from this valuation - especially when the share count should shrink in a meaningful way over time if the stock keeps trading at such a big discount to IV, which they've telegraphed, and w/ huge leverage on fixed overhead.

 

So I think Fairfax is "worth" US$1500-2000 per share today. From that price, you'd expect to earn a fair ~10% long term return. As a sanity check, that would roughly line up with peers valuations on '23/'24... and FFH really does now have a lot more float than peers relative to its asset base and, yes, has demonstrated the ability to underwrite profitably long term.

 

Of course, this relies on steady execution and no huge macro overlays / swings for the fences, which made the whole thing hard to handicap before but seem to be in the rearview mirror now.

 

Edited February 21, 2023 by MMM20

[giulio]

9 hours ago, bluedevil said:

It seems reasonable to think that Fairfax will be able to underwrite insurance at 100CR over the very long term.  Doesn't that mean -- that if you make that one assumption -- that Fairfax should be valued at a market cap of something over $40 billion, versus its market cap today of about $16 billion?  i believe the investment portfolio is over $50 billion, and debt is about $6 billion.  Curious on people's thoughts on this.

I did this exercise and arrived at your same conclusion.  I have not updated my numbers for 2022, but in 2021 I get net investment + capitalized underwriting profits = $1800 per share value, which seems too high.

 

Calculating look-through earnings I estimated FFH earning power at $1.5B in 2021. At 13x it gives you $20B of equity.

 

These two numbers should be roughly similar: either the BS is "inflated" or the company is severely under-earning. I believe the latter to be true and 2022 seems to be confirming evidence.

FFH can easily earn $2-3B IMO. What multiple would pay for this streaming of cash? Highly subjective.

 

"Adjusted BV" valuation and earning power valuation should converge thanks to good execution and lower number of shares, however I am not saying fair value is $1800 per share!

 

 

 

 

 

[giulio]

1 hour ago, gfp said:

Personnel changes - Brian Young, CEO of Odyssey will share oversight with Andy Barnard over all of Fairfax's insurance companies:

https://www.fairfax.ca/news/press-releases/press-release-details/2023/Fairfax-Financial-Holdings-Personnel-Announcements/default.aspx

Very good news for shareholders! Succession does not seem to be a problem; talent bench is deep at FFH thanks to their culture and ability to retain top employees.

 

Another advantage not much appreciated by investors.

[Intelligent_Investor]

11 hours ago, bluedevil said:

I was reading Tom Gaynor's annual letter to Markel shareholders and noted his description of how to value Markel, which is similar to how I have also seen people value Berkshire:

 

One part of the assessment is extremely straightforward. If you assume that we will continue to be profitable in our insurance operations, and we do not shrink, the total value of the investment portfolio accrues to the shareholders. The earnings from our investment portfolio are like fruit from a fruit tree. If you were valuing a fruit tree, the value is the present value of the fruit the tree will produce over time. Same thing with our investment portfolio.  As such, we simply take the total value of our investment portfolio and subtract out all debt, to get an indication of the value of the balance sheet part of Markel.

 

Another important part of estimating an indication of the value of Markel stems from the earnings power of our Insurance and Markel Ventures operations. We take the normal, annualized earnings from those operations and multiply that by a consistent and reasonable multiple year-by-year. That process provides an indication of the total value of Markel’s income statement. Then we add those two parts together to determine our own sense of what each share of Markel is worth.  

 

Do others here see the balance sheet description as a valid way to measure the value of an insurer that over the long term has demonstrated the ability to underwrite profitably?

 

It seems reasonable to think that Fairfax will be able to underwrite insurance at 100CR over the very long term.  Doesn't that mean -- that if you make that one assumption -- that Fairfax should be valued at a market cap of something over $40 billion, versus its market cap today of about $16 billion?  i believe the investment portfolio is over $50 billion, and debt is about $6 billion.  Curious on people's thoughts on this.  

 

 

 

Yeah this is the BV+Float method that Sandy Gottesman used to determine when to buy Berkshire 

[MMM20]

 

 

 

 

 

 

 

Phil gets it...

[gary17]

@MMM20  What's Scotia's target price?  TIA!