Fairfax 2023

[Parsad]

18 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.  

 

 

 

 

This is the correct way to calculate the earning power of an insurer.  But like any breakdown of a business, you have to examine the working parts.  Let's look at BRK, MKL and FFH.  

 

MKL's business is more in line with BRK's structure.  There are a lot of wholly-owned operating businesses under "associates", and they both operate with a lower amount of asset/equity and debt/equity leverage than FFH.  Their insurance businesses are also quite diverse with both short-tail and long-tail business.  FFH for most of its existence had focused more on long-tail business. 

 

So using less leverage, holding more cash-flowing operating businesses, less debt and more diverse insurance businesses, BRK and MKL get more premium P/B valuations...especially BRK where that 3rd leg of "operating business/associates" cash flow is so huge and solid.  

 

FFH's limits on recurring, steady income from that 3rd leg of operating businesses, combined with higher leverage, and until the acquisitions of Allied and Brit (less diverse insurance portfolio) limited its P/B valuation. 

 

These are the things that also made FFH's insurance business much more volatile for many years.  Andy Barnard's oversight changed that.  He brought a much more steady and consistent underwriting culture to FFH's insurance businesses.  The acquisition of Brit and Allied diversified the stream of underwriting business on a global basis.  

 

For FFH to earn the premium on P/B, they need to keep more cash at the holdco level, increase the investment grade to at least "A" and add more quality...I reiterate...quality operating businesses.  Much of the non-insurance operating businesses they own are not 2 times book operating businesses, nor do they fully own or control many. 

 

FFH's power comes from the insurance engine...it really is more of a pure insurer than BRK or MKL.  It has a huge bond portfolio that is tied to the future loss payables from insurance managed by Brian and his team.  Then comes the abilities of Hamblin-Watsa to take some of that portfolio alongside excess retained earnings, and invest it appropriately in various equities, distressed opportunities and wholly-owned businesses.  That 3rd leg of "wholly-owned" businesses isn't a priority unlike MKL and BRK.  

 

Cheers!

[Cigarbutt]

18 hours ago, Munger_Disciple said:

 

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. 

The following uses unverified data but likely helps to form a conclusion on the cost of float for BRK.

Since end 2017 To Q3 2022, BRK has reported 2.942B in underwriting profit with an overall combined ratio slightly below 100% so on a purely arithmetic basis, the historical combined ratio since inception is possibly still slightly above 100%. However, on a money-weighted basis (float grew larger during more favorable underwriting results), the historical combined ratio is likely slightly below 100%.

 

Conclusion and relevance for the FFH thread? Many roads lead to Rome and there are many ways to project the value of FFH in the future but the best (best in the sense of best entry point for subsequent 'alpha' return) for BRK was when BRK was an insurer with a relatively poor underwriting record (70s and early 80s) which was about to improve (and grow++) and when on the edge of the greatest bond bull market of all times.

[Munger_Disciple]

1 hour ago, Parsad said:

MKL's business is more in line with BRK's structure.  There are a lot of wholly-owned operating businesses under "associates", and they both operate with a lower amount of asset/equity and debt/equity leverage than FFH.  Their insurance businesses are also quite diverse with both short-tail and long-tail business.  FFH for most of its existence had focused more on long-tail business. 

 

So using less leverage, holding more cash-flowing operating businesses, less debt and more diverse insurance businesses, BRK and MKL get more premium P/B valuations...especially BRK where that 3rd leg of "operating business/associates" cash flow is so huge and solid.  

 

FFH's limits on recurring, steady income from that 3rd leg of operating businesses, combined with higher leverage, and until the acquisitions of Allied and Brit (less diverse insurance portfolio) limited its P/B valuation. 

 

These are the things that also made FFH's insurance business much more volatile for many years.  Andy Barnard's oversight changed that.  He brought a much more steady and consistent underwriting culture to FFH's insurance businesses.  The acquisition of Brit and Allied diversified the stream of underwriting business on a global basis.  

 

For FFH to earn the premium on P/B, they need to keep more cash at the holdco level, increase the investment grade to at least "A" and add more quality...I reiterate...quality operating businesses.  Much of the non-insurance operating businesses they own are not 2 times book operating businesses, nor do they fully own or control many. 

 

FFH's power comes from the insurance engine...it really is more of a pure insurer than BRK or MKL.  It has a huge bond portfolio that is tied to the future loss payables from insurance managed by Brian and his team.  Then comes the abilities of Hamblin-Watsa to take some of that portfolio alongside excess retained earnings, and invest it appropriately in various equities, distressed opportunities and wholly-owned businesses.  That 3rd leg of "wholly-owned" businesses isn't a priority unlike MKL and BRK.  

 

Cheers!

 

Good insight. 

 

I too view Fairfax as being riskiest of the three mainly due to insurance leverage. Berkshire's earned premiums ($70B in 2021) are  a tiny fraction of its net worth compared to Fairfax where earned premiums are 130% of its net worth. It also means that a terrible year in insurance business is much more likely to wipe out equity at Fairfax. The same thing applies to investment results. In other words leverage cuts both ways. Hence Fairfax deserves much less premium to book value compared to Berkshire IMHO. 

 

At the end of the day, a bet on Fairfax is a bet on its insurance & investing acumen. Its ability to underwrite very well is critical due to its inherent leverage. 

 
 

Edited February 22, 2023 by Munger_Disciple

[Munger_Disciple]

42 minutes ago, Cigarbutt said:

The following uses unverified data but likely helps to form a conclusion on the cost of float for BRK.

Since end 2017 To Q3 2022, BRK has reported 2.942B in underwriting profit with an overall combined ratio slightly below 100% so on a purely arithmetic basis, the historical combined ratio since inception is possibly still slightly above 100%. However, on a money-weighted basis (float grew larger during more favorable underwriting results), the historical combined ratio is likely slightly below 100%.

 

Conclusion and relevance for the FFH thread? Many roads lead to Rome and there are many ways to project the value of FFH in the future but the best (best in the sense of best entry point for subsequent 'alpha' return) for BRK was when BRK was an insurer with a relatively poor underwriting record (70s and early 80s) which was about to improve (and grow++) and when on the edge of the greatest bond bull market of all times.

 

Thanks for the excellent post!

 

[KFS]

12 hours ago, Parsad said:

For FFH to earn the premium on P/B, they need to keep more cash at the holdco level, increase the investment grade to at least "A" and add more quality...I reiterate...quality operating businesses.  Much of the non-insurance operating businesses they own are not 2 times book operating businesses, nor do they fully own or control many.

 

FFH had a P/B of >1.2 as recently as 2018.  It's not clear to me that any of the items above were fundamentally better for FFH at that time.  Curious how one would explain this.  

 

 

[MMM20]

12 minutes ago, KFS said:

 

FFH had a P/B of >1.2 as recently as 2018.  It's not clear to me that any of the items above were fundamentally better for FFH at that time.  Curious how one would explain this.  

 

 

 

Shareholders hadn't completely thrown in the towel yet.

 

Narrative follows price.

 

[KFS]

5 minutes ago, MMM20 said:

 

Shareholders hadn't completely thrown in the towel yet.

 

Narrative follows price.

 

 

Right-- That was kind of my point.  These specific items are important to a degree, but overall investor sentiment is the driver.  

 

[MMM20]

1 hour ago, KFS said:

 

Right-- That was kind of my point.  These specific items are important to a degree, but overall investor sentiment is the driver.  

 

 

IMHO @Parsad's framing is correct and helpful... but it's also true that sentiment has a ways to go for this to hit fair value, and that the narrative around fewer wholly owned businesses than BRK / MKL could totally flip on its head again if FFH continues performing well on the investment side. A more liquid ("flexible!") portfolio than peers with as good or better recent performance + willingness to sell stuff at the right price (cough cough Coke cough cough Apple) + greater quantum of 0 cost leverage + longer runway for higher returns at their smaller size

 

Story shifts back to *higher expected returns* if with inherently higher risk and volatility... not the low returns and high volatility of a big stretch of the 2010s... => parity or better on valuation

 

Just don't be surprised if it plays out like that.

 

Edited February 22, 2023 by MMM20

[TwoCitiesCapital]

3 hours ago, KFS said:

 

FFH had a P/B of >1.2 as recently as 2018.  It's not clear to me that any of the items above were fundamentally better for FFH at that time.  Curious how one would explain this.  

 

 

 

2 hours ago, MMM20 said:

 

Shareholders hadn't completely thrown in the towel yet.

 

Narrative follows price.

 

 

This. I made the mathematical case that is was nearly impossible for Fairfax to make attractive forward returns in 2018 given interest rates and equity markets. 

 

I sold ALL of my Fairfax that I had been accumulating for the prior 7-years at $500-600 because the market seemed to be very optimistic. 

 

Turns out, mathematics was right and Covid changed the narrative to "Fairfax has been dead money for a decade" despite insurance, rates, equities, and repurchases ALL syncing up to make forward looking returns fantastic....and the price of the stock was 1/2 to 3/4 what it had been 2-3 years prior. 

[Saluki]

2 hours ago, TwoCitiesCapital said:

 

 

This. I made the mathematical case that is was nearly impossible for Fairfax to make attractive forward returns in 2018 given interest rates and equity markets. 

 

I sold ALL of my Fairfax that I had been accumulating for the prior 7-years at $500-600 because the market seemed to be very optimistic. 

 

Turns out, mathematics was right and Covid changed the narrative to "Fairfax has been dead money for a decade" despite insurance, rates, equities, and repurchases ALL syncing up to make forward looking returns fantastic....and the price of the stock was 1/2 to 3/4 what it had been 2-3 years prior. 

 

Are you suggesting that the market is inefficient?  Keep talking like that and you'll get rich, but you'll never get tenure and a key to the faculty lounge. 

[Viking]

At the end of the day, what i care about is total return. From today (even after its stellar run over the past 1 and 2 years) my guess is Fairfax’s total return will outperform both Markel and Berkshire in both 2023 and 2024 and probably by a lot.
 

Berkshire is in full-on wealth preservation mode. Buffett has said so repeatedly in recent years. The goal is to preserve the wealth of long term shareholders. BRK has morphed into a bond like equity. That is not a bad thing. But it is what it is. Perhaps BRK starts to mildly outperform the S&P over the next 5 years.
 

Markel is not nearly as cheap as Fairfax so it already has one hand tied behind its back (in the total return race). And Markel’s bond portfolio is longer duration so they are not getting the tailwind of higher interest rates to the same degree as Fairfax. The increase in interest income is the biggest driver of the spiking operating earnings at Fairfax (up $1 billion in 2023 compared to 2021). 
 

All three are solid companies. My read is the stars have aligned for Fairfax. And that will drive continued outperformance over the near term. 
—————

What about looking 4 or 5 years out? No idea. There are simply too many moving parts to be able to conclude anything with any degree of accuracy.

[Parsad]

6 hours ago, KFS said:

 

FFH had a P/B of >1.2 as recently as 2018.  It's not clear to me that any of the items above were fundamentally better for FFH at that time.  Curious how one would explain this.  

 

 

 

You're talking about being at a P/B of 1.2 for like a year and a half...not over 20-30 years like MKL or BRK.  Fairfax was also at a P/B of 4 in 1998 for about 8 months.  That doesn't mean analysts or investors viewed it as a long-term, stable, high quality insurer.  Cheers!

[Dudley]

2 hours ago, Viking said:

At the end of the day, what i care about is total return. From today (even after its stellar run over the past 1 and 2 years) my guess is Fairfax’s total return will outperform both Markel and Berkshire in both 2023 and 2024 and probably by a lot.
 

Berkshire is in full-on wealth preservation mode. Buffett has said so repeatedly in recent years. The goal is to preserve the wealth of long term shareholders. BRK has morphed into a bond like equity. That is not a bad thing. But it is what it is. Perhaps BRK starts to mildly outperform the S&P over the next 5 years.
 

Markel is not nearly as cheap as Fairfax so it already has one hand tied behind its back (in the total return race). And Markel’s bond portfolio is longer duration so they are not getting the tailwind of higher interest rates to the same degree as Fairfax. The increase in interest income is the biggest driver of the spiking operating earnings at Fairfax (up $1 billion in 2023 compared to 2021). 
 

All three are solid companies. My read is the stars have aligned for Fairfax. And that will drive continued outperformance over the near term. 
—————

What about looking 4 or 5 years out? No idea. There are simply too many moving parts to be able to conclude anything with any degree of accuracy.

 

I agree with this take. Fairfax is trading at 1.0 P/B while MKL and BRK are at ~1.5 P/B. By itself, the $1B increase in bond income (i.e. from $500M to $1.5B) accounts for a 6% return on book. The one counter to do this is that it may indeed be temporary, although I'm sure they will manage to extend/lock in this income stream for as long as possible.

 

It's hard to think of another company that benefits from rate increases as much as Fairfax. Psychologically, I think that Prem has to be equal parts excited and cautious. The only thing he wants more than fully capitalizing on the opportunity in front of Fairfax is not repeating the mistakes of the past. Once you've been through a long period of underperformance, it's hard for that not to leave an imprint on your psychology.

[glider3834]

3 hours ago, Viking said:

At the end of the day, what i care about is total return. From today (even after its stellar run over the past 1 and 2 years) my guess is Fairfax’s total return will outperform both Markel and Berkshire in both 2023 and 2024 and probably by a lot.
 

Berkshire is in full-on wealth preservation mode. Buffett has said so repeatedly in recent years. The goal is to preserve the wealth of long term shareholders. BRK has morphed into a bond like equity. That is not a bad thing. But it is what it is. Perhaps BRK starts to mildly outperform the S&P over the next 5 years.
 

Markel is not nearly as cheap as Fairfax so it already has one hand tied behind its back (in the total return race). And Markel’s bond portfolio is longer duration so they are not getting the tailwind of higher interest rates to the same degree as Fairfax. The increase in interest income is the biggest driver of the spiking operating earnings at Fairfax (up $1 billion in 2023 compared to 2021). 
 

All three are solid companies. My read is the stars have aligned for Fairfax. And that will drive continued outperformance over the near term. 
—————

What about looking 4 or 5 years out? No idea. There are simply too many moving parts to be able to conclude anything with any degree of accuracy.

I agree Viking - put another way FFH is on a forward 15% after tax yield - see Prem's comment Q4 call - name one other insurer globally thats trading that cheaply?

 

I agree with @Parsad that all of us want FFH to continue to improve the quality of its equity investments/operating businesses & raise credit rating & cash at holdco.

 

I think with holdco they are in full growth mode with the insurance ops while we are in a hard market & the insurance subs as hard market starts to ease, will be receiving this 1.5B in interest/div income etc - they will be in a stronger position with excess capital & they can dividend back to the holdco - holdco's cash will increase & holdco will be in position to buyback shares or add to equity/bond holdings or buy operating businesses. So its coming, we have to be patient but as a shareholder you want them to be expanding, taking advantage of this hard market while pricing is good.

 

On quality of the underlying operating businesses - I don't mind if they own fractional shareholdings or wholly own subs - but agree we don;t want to see them allocating money to speculative start ups (like Farmers Edge) we want them to be investing in mature, cash generative operating businesses. Now I would argue the last 3 years supports the idea that they recognise this - if you look at their larger equity purchases they are well established, cash generative businesses and examples of recent additions Mytilineos, Kennedy Wilson, Atlas, Bank of America, Micron Technology, Grivalia Hospitality, Recipe - none of these are speculative, start ups. 

 

Also I think there has been organic improvement with quality of underlying operations eg two examples Eurobank &  Stelco - if you go back 3-5 years & compare to now - quality of underlying business has been raised a lot due to management. 

 

 

 

 

 

 

 

 

 

 

Edited February 22, 2023 by glider3834

[Viking]

1 hour ago, glider3834 said:

I agree Viking - put another way FFH is on a forward 15% after tax yield - see Prem's comment Q4 call - name one other insurer globally thats trading that cheaply?

 

I agree with @Parsad that all of us want FFH to continue to improve the quality of its equity investments/operating businesses & raise credit rating & cash at holdco.

 

I think with holdco they are in full growth mode with the insurance ops while we are in a hard market & the insurance subs as hard market starts to ease, will be receiving this 1.5B in interest/div income etc - they will be in a stronger position with excess capital & they can dividend back to the holdco - holdco's cash will increase & holdco will be in position to buyback shares or add to equity/bond holdings or buy operating businesses. So its coming, we have to be patient but as a shareholder you want them to be expanding, taking advantage of this hard market while pricing is good.

 

On quality of the underlying operating businesses - I don't mind if they own fractional shareholdings or wholly own subs - but agree we don;t want to see them allocating money to speculative start ups (like Farmers Edge) we want them to be investing in mature, cash generative operating businesses. Now I would argue the last 3 years supports the idea that they recognise this - if you look at their larger equity purchases they are well established, cash generative businesses and examples of recent additions Mytilineos, Kennedy Wilson, Atlas, Bank of America, Micron Technology, Grivalia Hospitality, Recipe - none of these are speculative, start ups. 

 

Also I think there has been organic improvement with quality of underlying operations eg two examples Eurobank &  Stelco - if you go back 3-5 years & compare to now - quality of underlying business has been raised a lot due to management. 

For the first time in more than a decade (ever?) Fairfax will likely be generating billions in operating earnings. This is a significant amount of cash they can then redeploy. At the same time, we are in a bear market. So Fairfax is generating gobs of cash right at the same time stocks and bonds are in a bear market (i.e. cheap to wicked cheap). This bear market is an incredible gift for Fairfax and Fairfax shareholders. Buying at bear markets lows + compounding = value investor heaven. Investors in Fairfax today are underestimating what will be coming (in terms of investment gains) looking out a couple of years. BECAUSE PAST RESULTS IS STILL PRETTY MUCH USELESS IN INFORMING AN INVESTOR WHAT FUTURE EARNINGS WILL BE. That is usually the case for turnarounds like Fairfax.
 

If Fairfax is able to make $1.5 billion in new investments at bear market lows that generate an 10% return (low) moving forward = $150 million incremental in investment gains/increase in intrinsic value. Do that for a couple of years and by 2025 we will see an incremental $450-$500 million in gains EACH YEAR (compared to today). 
 

Rightly so, investors in Fairfax today are focussed on spiking interest and dividend income; it is an amazing story. It is also sowing the seeds of the next big uptick in earnings for Fairfax - this one from investment gains. The Fairfax story continues to get better….

—————
Perhaps Fairfax also buys back another 10% of shares outstanding over the next three years. Perhaps Fairfax buys back another slug of Allied World. Bottom line, Fairfax has lots of cash and lots of obvious, solid return investment opportunities. Capital allocation has likely never been easier.

—————

I continue to be amazed at the decision made in late 2020 and early 2021 to buy the TRS on FFH shares = 1.96 million (i call that the Fed VanVleet - bet on yourself - decision). Now i do not expect future capital allocation decisions to be as lucrative for shareholders as this single investment. But it certainly will be interesting to follow what they do with all the cash they are currently generating. 

Edited February 22, 2023 by Viking

[giulio]

Thinking about value on a per share level, buybacks will also mitigate some decline in earnings.

And don't forget India! Fairfax India, BIAL and Digit are high quality business and should generate higher earnings going forward.

 

Lots to like, on top of higher interest income.

 

G

 

[glider3834]

Just reviewing some of the earnings power components of Markel & Fairfax for 2022.

 

MKL

NPW $8.2B

Underwriting Profit $626M

Investment income $446M

Markel Ventures Operating income $325M
 

 

Fairfax

NPW $22.2B

Underwriting profit $1.1B (mgmt conservative projection $1B in 2023)

Investment income $961M (mgmt expect $1.5B in 2023)

Share of Profit of Associates $1B  (mgmt conservative projection $0.5B in 2023)

 

FFH has more non-controlling interests than Markel, just under 6% of net earnings in Q4 & so the above pre-tax figures need to be adjusted down for this.

 

FFH's interest repayments are around 452M vs 196M for MKL

 

It looks like FFH's  income pre-tax (adjusting for interest exp & non-controlling interests) is approximately 84% higher than MKL .

 

MKL mkt cap is $17.9B and FFH mkt cap is $16B

 

With all my posts, I try to get the numbers right but please always double check my math (ie do your  own due diligence) Cheers!

 

(note also that FFH has more RSUs than MKL - I have ignored here as they are long-term & FFH is buying back in - but there is still a buyback cost here for FFH you might want to factor in)

 

Edited February 23, 2023 by glider3834

[Luca]

8 hours ago, glider3834 said:

Just reviewing some of the earnings power components of Markel & Fairfax for 2022.

 

MKL

NPW $8.2B

Underwriting Profit $626M

Investment income $446M

Markel Ventures Operating income $325M
 

 

Fairfax

NPW $22.2B

Underwriting profit $1.1B (mgmt conservative projection $1B in 2023)

Investment income $961M (mgmt expect $1.5B in 2023)

Share of Profit of Associates $1B  (mgmt conservative projection $0.5B in 2023)

 

FFH has more non-controlling interests than Markel, just under 6% of net earnings in Q4 & so the above pre-tax figures need to be adjusted down for this.

 

FFH's interest repayments are around 452M vs 196M for MKL

 

It looks like FFH's  income pre-tax (adjusting for interest exp & non-controlling interests) is approximately 84% higher than MKL .

 

MKL mkt cap is $17.9B and FFH mkt cap is $16B

 

With all my posts, I try to get the numbers right but please always double check my math (ie do your  own due diligence) Cheers!

 

(note also that FFH has more RSUs than MKL - I have ignored here as they are long-term & FFH is buying back in - but there is still a buyback cost here for FFH you might want to factor in)

 

Did you include the investment income from the equity portfolio that is not accounted for due to no dividends etc? 

All these businesses earn a decent amount every year, 7b Portfolio. Wouldnt be surprised if this portfolio compounds at 7% and will double in 10 years at least. 

 

Compared to fairfax, the portfolio is bigger, isnt it.

 

 

Edited February 23, 2023 by Luca

[glider3834]

46 minutes ago, Luca said:

Did you include the investment income from the equity portfolio that is not accounted for due to no dividends etc? 

All these businesses earn a decent amount every year, 7b Portfolio. Wouldnt be surprised if this portfolio compounds at 7% and will double in 10 years at least. 

 

Compared to fairfax, the portfolio is bigger, isnt it.

 

 

Good point luca investment income only includes dividends received - i havent looked at look through earnings for MKL or FFH but would be an interesting exercise for both 

[MMM20]

5 hours ago, glider3834 said:

Good point luca investment income only includes dividends received - i havent looked at look through earnings for MKL or FFH but would be an interesting exercise for both 

I think many people miss this point. Think about how much BRK’s % ownership of AAPL has increased as AAPL has bought back stock. That doesn’t appear as a dividend or look through earnings anything on BRK’s financials… just short term stock movements obscuring the economics. Same sort of thing is true for FFH.
 

IMHO it’s best to think through a reasonable total return on investments and what that means for FFH shareholders irrespective of accounting treatment, or even FFH’s cash flows in/out, if enough of their underlying holdings are retaining earnings and making good reinvestment decisions. The value can add up.
 

And what would an ~8-10% total return on FFH’s underlying equity holdings (however they are accounted for) over ~5-10 years mean for shareholders? IV/share could reasonably ~2x over ~5 years, even with “meh” scenarios for underwriting, cash/fixed income, and buybacks. 

 

Edited February 23, 2023 by MMM20

[Parsad]

19 hours ago, glider3834 said:

Just reviewing some of the earnings power components of Markel & Fairfax for 2022.

 

MKL

NPW $8.2B

Underwriting Profit $626M

Investment income $446M

Markel Ventures Operating income $325M
 

 

Fairfax

NPW $22.2B

Underwriting profit $1.1B (mgmt conservative projection $1B in 2023)

Investment income $961M (mgmt expect $1.5B in 2023)

Share of Profit of Associates $1B  (mgmt conservative projection $0.5B in 2023)

 

FFH has more non-controlling interests than Markel, just under 6% of net earnings in Q4 & so the above pre-tax figures need to be adjusted down for this.

 

FFH's interest repayments are around 452M vs 196M for MKL

 

It looks like FFH's  income pre-tax (adjusting for interest exp & non-controlling interests) is approximately 84% higher than MKL .

 

MKL mkt cap is $17.9B and FFH mkt cap is $16B

 

With all my posts, I try to get the numbers right but please always double check my math (ie do your  own due diligence) Cheers!

 

(note also that FFH has more RSUs than MKL - I have ignored here as they are long-term & FFH is buying back in - but there is still a buyback cost here for FFH you might want to factor in)

 

 

This is true but asset/equity and debt/equity leverage is powering that difference.  In large catastrophe years, it will cut the other way and Fairfax will lose much more than Markel.  I would be much happier with more stable earnings for FFH and balance sheet stability.  Cheers!

[Luca]

9 hours ago, MMM20 said:

I think many people miss this point. Think about how much BRK’s % ownership of AAPL has increased as AAPL has bought back stock. That doesn’t appear as a dividend or look through earnings anything on BRK’s financials… just short term stock movements obscuring the economics. Same sort of thing is true for FFH.
 

IMHO it’s best to think through a reasonable total return on investments and what that means for FFH shareholders irrespective of accounting treatment, or even FFH’s cash flows in/out, if enough of their underlying holdings are retaining earnings and making good reinvestment decisions. The value can add up.
 

And what would an ~8-10% total return on FFH’s underlying equity holdings (however they are accounted for) over ~5-10 years mean for shareholders? IV/share could reasonably ~2x over ~5 years, even with “meh” scenarios for underwriting, cash/fixed income, and buybacks. 

 

Well said. Thats at least high teens of billions of earnings not accounted for in berkshire. I dont know what the average PE of berkshires equity portfolio is, i guess something between 15-25. 300b of value, something between 15-20b. We cant know which positions are there not visible and what PE. That gives you an extra of up to 200b of marketcap value if you give it something like a 10x multiple which is low for the quality those businesses have. And i think this equity portfolio will compound at least 7% per annum, so 600b worth of an equity portfolio in 2032. 

Edited February 23, 2023 by Luca

[MMM20]

@Luca not sure I follow your example but yeah, I think we must look at look-through earnings on their equity holdings (and not just dividends and quarterly price movements) when we are thinking about the underlying earnings power of the business.
 

The marked-to-market vs associates vs fully consolidated accounting treatment of their equity investments does no one any favors… it’s basically arbitrary from an long term investor POV.
 

I wish Chris Bloomstran would give FFH the same 100 page valuation update treatment as he does BRK… to lay this out better than I ever could.

 

Edited February 24, 2023 by MMM20

[glider3834]

6 hours ago, Parsad said:

 

This is true but asset/equity and debt/equity leverage is powering that difference.  In large catastrophe years, it will cut the other way and Fairfax will lose much more than Markel.  I would be much happier with more stable earnings for FFH and balance sheet stability.  Cheers!

just on cat risk exposure - yes higher than Markel but I think Fairfax have been taking pro-active steps here worth talking about

 

Cat losses were $1.3B In 2017 & that was 12.3% of net premium (adjusted to include a full year of premium from AWH) whereas in 2022, we had $1.3B in cat losses & it was 6.2% of net premium & they generated a $1.1B underwriting profit. 

 

To me that suggests while they have more than doubled their net premium earned, they are not growing their cat exposure. They also said they are keeping their cat exposure constant on a conference call, but its also good to see it reflected in the reported figures.

 

Also Brit recently reported they are reducing their cat risk exposure & Brit was responsible for 50% of the Ian loss that drove 50% of cat loss in 2022. This hopefully will have a flow on impact for 2023 & going forward so maybe potentially cat loss to net premium earned could fall further.

 

Also I wouldn't want FFH to completely do a u-turn on reinsurance business given the very hard market in 2023 & much more attractive reward on risk economics there now than in last 5 yrs. MKL looks like they have scaled back their property reinsurance business appetite too.

 

 

 

 

Edited February 24, 2023 by glider3834

[Xerxes]

1 hour ago, MMM20 said:

I wish Chris Bloomstran would give FFH the same 100 page valuation update treatment as he does BRK… to lay this out better than I ever could.

 

 

He barely talks about his other holdings in his portfolio.