Fairfax 2023

[nwoodman]

3 minutes ago, allycat18 said:

Hi all 

Do you believe   morning stars Horn's comments  will put a long term slow down o  growth for Fairfax ? Do they have to put a few more quarters of results to see the value progression?

 

 

I can guarantee you Fairfax’s growth, as a company,  is independent of Brett Horn’s comments

Edited May 30, 2023 by nwoodman

[Parsad]

58 minutes ago, nwoodman said:

I can guarantee you Fairfax’s growth, as a company,  is independent of Brett Horn’s comments

 

Horn may actually have to put in a few more quarters of studying Fairfax for his own personal growth progression as a CFA.  Cheers!

[Thrifty3000]

 

^ I like Morningstar’s historical price to fair value chart. I assume Brett will take notice as FFH’s price climbs even further into the “overvalued” band.

 

He might appreciate an email from someone bullet pointing other analyst’s FV estimates, and summarizing the key reasons for the re-rating.
 

- Maybe a direct quote of Prem’s statements on expected per share operating earnings

- Recent premium volume growth

- Recent share repurchase trend

 

Dude just needs a wake-up call. Morningstar analysts can’t invest in the stocks they cover. No skin in the game.

[Thrifty3000]

13 minutes ago, Thrifty3000 said:

 

^ I like Morningstar’s historical price to fair value chart. I assume Brett will take notice as FFH’s price climbs even further into the “overvalued” band.

 

He might appreciate an email from someone bullet pointing other analyst’s FV estimates, and summarizing the key reasons for the re-rating.
 

- Maybe a direct quote of Prem’s statements on expected per share operating earnings

- Recent premium volume growth

- Recent share repurchase trend

 

Dude just needs a wake-up call. Morningstar analysts can’t invest in the stocks they cover. No skin in the game.

On second thought. Don’t tell him. I’m probably not a net buyer of FFH going forward. But, I’d love to increase my ownership. So, I want FFH buying back as much as possible while this sucker’s cheap!

[Luke]

Just now, Thrifty3000 said:

On second thought. Don’t tell him. I’m probably not a net buyer of FFH going forward. But, I’d love to increase my ownership. So, I want FFH buying back as much as possible while this sucker’s cheap!

+1!

[Hoodlum]

It looks like Hurricane season will be closer to normal this year, less active than the last few years.  This El Nino effect will likely continue for the next 2-3 years.

https://www.noaa.gov/news-release/2023-atlantic-hurricane-season-outlook

 

Quote

The upcoming Atlantic hurricane season is expected to be less active than recent years, due to competing factors — some that suppress storm development and some that fuel it — driving this year's overall forecast for a near-normal season. 

 

[Parsad]

14 minutes ago, Hoodlum said:

It looks like Hurricane season will be closer to normal this year, less active than the last few years.  This El Nino effect will likely continue for the next 2-3 years.

https://www.noaa.gov/news-release/2023-atlantic-hurricane-season-outlook

 

 

 

Pacific hurricanes are expected to be higher.

 

https://www.noaa.gov/news-release/noaa-predicts-near-or-above-normal-2023-central-pacific-hurricane-season

 

I expect a very busy wildfire season as well...take a look at the massive fire near Halifax...some 60+ fires burning near Calgary...and BC is already seeing a large number of wildfires this season.

 

Cheers!

 

 

[Hoodlum]

19 minutes ago, Parsad said:

 

Pacific hurricanes are expected to be higher.

 

https://www.noaa.gov/news-release/noaa-predicts-near-or-above-normal-2023-central-pacific-hurricane-season

 

I expect a very busy wildfire season as well...take a look at the massive fire near Halifax...some 60+ fires burning near Calgary...and BC is already seeing a large number of wildfires this season.

 

Cheers!

 

 

 

But haven't the Atlantic Hurricanes had the most impact on the insurance business.

[Parsad]

12 minutes ago, Hoodlum said:

 

But haven't the Atlantic Hurricanes had the most impact on the insurance business.

 

Atlantic hurricanes hitting Florida and Gulfcoast hurricanes hitting Louisiana/Texas/etc have done the most damage.  Last few years, wildfires and ice storms/snow have created significant losses as well.  Cheers!

[jbwent63]

36 minutes ago, Parsad said:

 

Pacific hurricanes are expected to be higher.

 

https://www.noaa.gov/news-release/noaa-predicts-near-or-above-normal-2023-central-pacific-hurricane-season

 

I expect a very busy wildfire season as well...take a look at the massive fire near Halifax...some 60+ fires burning near Calgary...and BC is already seeing a large number of wildfires this season.

 

Cheers!

 

 

If wildfires are started by arsonists, does that give the insurers an "out" to avoid claims? Subrogation would be difficult (assuming the firebug isn't a billionaire).

[Tommm50]

19 minutes ago, jbwent63 said:

If wildfires are started by arsonists, does that give the insurers an "out" to avoid claims? Subrogation would be difficult (assuming the firebug isn't a billionaire).

 

Nope, as long as the homeowner didn't start it.

[Thrifty3000]

13 minutes ago, Haryana said:

 

Thanks for that chart, they kept a relatively high fair price during the pandemic crash.

 

Maybe our internal evaluation of intrinsic value is even lower than that of Morningstar.

 

Many of the posters here have disclosed their cost basis to be much lower than $730-790.

 

What is the point of pumping the prospects if we refusing to buy stock at current price?

 

If I didn’t already own shares I’d be a buyer at the current price. I started buying with conviction in 2020 when the price was $250 and I estimated normal earnings would be in the $30 to $35 per share range (based, wrongly, on historical earnings).

 

That’s not all that different from the setup today where shares are $730 and normal earnings are likely $100+ per share.

Edited May 31, 2023 by Thrifty3000

[Viking]

2 hours ago, Haryana said:

What is the point of pumping the prospects if we refusing to buy stock at current price?

I tend to hold concentrated positions. When i concentrate i like to get into the weeds. We are constantly getting new news. So the story is constantly changing. Sometimes the changes are minor… sometimes they are major. I like to post what i learn. And i enjoy the feedback from other posters. Be inquisitive and be open minded. Now that might look like ‘pumping’ a stock. I view it more as tending to the eggs in my basket. It works for me. 
 

With Fairfax, i have a core position - something i plan on holding for a few years (as of today). At times i will buy more and flex if bigger. Sometimes quite a bit bigger. Other times i will sell some and flex my position size lower. ‘Flexing’ will depend on lots of different things: changes to the FFH ‘story’ (fundamentals), the price of FFH stock (Mr Market), what is going on in the overall stock market (that opportunity cost thing)… too many variables to list. 
 

Fairfax is a VERY volatile stock - moves of 20-30% each year are not uncommon. We are entering hurricane season. Having said that, my guess is Fairfax will be aggressive buying back stock this year via the NCIB so the stock may continue to surprise to the upside. No idea where the stock price will go over the short term. But over the next few years i am confident the stock will continue to power higher. And i am confident because of the work i put in to understand the investment. It is a constantly evolving process - involving lots of lengthy posts along the way.

Edited May 31, 2023 by Viking

[valuesource]

On 5/30/2023 at 9:41 AM, gfp said:

That Morningstar analyst report reads like it was written years ago.

 

On another note, does anybody here know if the profits on the total return swaps on FFH's own shares are tax-free to the company?  I know that usually transactions in an issuers own stock are not taxed (for example if Biglari Holdings were to ever record a profit on their holdings of own shares the "profit" would be tax-free) - but I do not know if that extends to derivatives on an issuer's own stock.

Sometimes Analysts are little more than shills for Hedge Funds.  Remember John Gwynn from Morgan Keegan (an unknown Dealer based in Memphis)?  In my estimation, most Short Reports/Bear Raids include a bearish Analyst and some Hedge Funds.  Usually, the Hedgies are already short before the report is published.  I'm sure the analysts get paid in hard or soft dollars first.  Then they cover quickly.  In a finite number of cases, I think the Analyst may produce a report as a litmus test, prior to putting on the short.  This tends to happen in cases like today for FFH.  It has risen steeply over the past 2 years.

 

Unfortunately, bear raids don't usually work themselves out quickly.  We suffered through a successful bear raid from 2003-2006 which resolved in 2008 with the CDS exposure.  I recall talking to Bradstreet about it.  They had some diversified exposure to:  Monoline Bond Insurers (Radian, MGIC), Lehman, AIG, Fannie Mae, Freddie Mac.  Obviously some of these didn't work out but all had potential.  AIG CDS protection cost 30bps in 2007 and ballooned to 3,600bps before they were rescued.  Lehman was 55bps and a static bankruptcy took it to 10,000bps.  Same with Radian and MGIC.  Fannie and Freddie did not work out.  Still FFH made a profit on CDS close to their 3B cap at the time.

 

Fairfax claims victory after broker fires analyst - The Globe and Mail

[newtovalue]

Brilliant - buy when there is blood in the streets.

 

8.6% yield. 51% loan to value. 1.7 years to maturity - $2.1BB notional. 

 

I LOVE this deal. FFH can get in on the cheap bank assets through KW. Winners keep winning.

 

 

https://www.fairfax.ca/news/press-releases/press-release-details/2023/Fairfax-Financial-Partners-With-Kennedy-Wilson-to-Acquire-Loan-Portfolio-From-Pacific-Western-Bank-Makes-Additional-Equity-Investment-in-Kennedy-Wilson/default.aspx

[gfp]

It's better than that - it's essentially a blended 10% yield to maturity on something like $3B in total capital.  Plus the incremental investment in KW that should do well in addition.

[bluedevil]

Yeah - this seems like a great, opportunistic deal.

 

The key is that if any of these loans default, KW has the expertise to take over and manage, and with the LTVs being modest, have a very good chance of not losing money.

 

Sounds like the loans are going to run off pretty quickly, but should be very nice while it lasts for the next 2 years.

 

 

 

[Intelligent_Investor]

On 5/31/2023 at 9:35 AM, Hoodlum said:

It looks like Hurricane season will be closer to normal this year, less active than the last few years.  This El Nino effect will likely continue for the next 2-3 years.

https://www.noaa.gov/news-release/2023-atlantic-hurricane-season-outlook

 

 

It's not the number that counts, its the severity. 1992 was a very inactive season (only 7 storms, 4 hurricanes, and 1 major hurricane), but the major hurricane was Andrew which was the costliest Atlantic hurricane for a long time. Now, even 30 years later no one talks about 1992 as an inactive season, all anyone remembers is Andrew leveling Miami. Even if there isn't that many hurricanes if we get "the big one", the impacts will be catastrophic and cause losses to the insurance industry

[Parsad]

6 hours ago, Intelligent_Investor said:

It's not the number that counts, its the severity. 1992 was a very inactive season (only 7 storms, 4 hurricanes, and 1 major hurricane), but the major hurricane was Andrew which was the costliest Atlantic hurricane for a long time. Now, even 30 years later no one talks about 1992 as an inactive season, all anyone remembers is Andrew leveling Miami. Even if there isn't that many hurricanes if we get "the big one", the impacts will be catastrophic and cause losses to the insurance industry

 

+1!  Cheers!

[Parsad]

9 hours ago, newtovalue said:

Brilliant - buy when there is blood in the streets.

 

8.6% yield. 51% loan to value. 1.7 years to maturity - $2.1BB notional. 

 

I LOVE this deal. FFH can get in on the cheap bank assets through KW. Winners keep winning.

 

 

https://www.fairfax.ca/news/press-releases/press-release-details/2023/Fairfax-Financial-Partners-With-Kennedy-Wilson-to-Acquire-Loan-Portfolio-From-Pacific-Western-Bank-Makes-Additional-Equity-Investment-in-Kennedy-Wilson/default.aspx

 

If I understand the deal correctly, it's a total obligation of $4B ($2.3B current loans being bought for $2B, with future loan funding of up to $1.7B).

 

The $2.3B effectively works out to 10% because of the 8.6% yield and discount of the purchase price.  Will the future $1.7B be at 8.6% as well?

 

If so, that's recurring income for the next two years of up to around $400M each year depending on when they loan the $1.7B, plus the loans are secured and there is a ton of current equity.

 

Win-win-win for FFH!  Cheers!

[maxthetrade]

I like the deal, looks very solid, much better than some crazy macro bet! 

[glider3834]

On 5/30/2023 at 4:58 PM, glider3834 said:

Just looking at this quote above from Morningstar.

 

Based on my estimates, over last 9 years (2013-2022) 

- Operating Income has grown at 14% CAGR

- Pre-tax operating income (before investment gains) per share has grown 15% CAGR

 

Pre-tax Operating Income (excluding investment gains) as a percentage of Common Shareholder Equity (start of period) was 15% in 2022 (versus 7% in 2013).

 

If we are looking at what sort of ROE or BVPS growth rate Fairfax can sustain going forward, IMHO I would look to pre-tax operating income (excluding investment gains) as a key driver.

 

If you then consider over 50% of Fairfax's BVPS growth rate since inception has come from investment gains, it doesn't seem unreasonable to expect a positive number here when measured over longer periods.

 

(Table below I put together from 2013 & 2022 Annual reports)   

 

 

 

Also please always do your own due diligence & don't just rely on my figures. Thanks!

 

Just realised I didn't factor in estimate for minority interests share of pre-tax income in above table - so now factoring this in, results in my new estimate for CAGR for pre-tax income growth per common share at 14% over last 9 yrs

 

Edited June 6, 2023 by glider3834

[gfp]

If Fairfax is really interested in extending duration while not giving up too much from their t-bill yields or taking additional credit risk I hope they took some of this BNSF offering yesterday.  5.2%, 30+ years, obviously a good credit

https://www.sec.gov/Archives/edgar/data/934612/000119312523160840/d477190dfwp.htm

[SafetyinNumbers]

45 minutes ago, gfp said:

If Fairfax is really interested in extending duration while not giving up too much from their t-bill yields or taking additional credit risk I hope they took some of this BNSF offering yesterday.  5.2%, 30+ years, obviously a good credit

https://www.sec.gov/Archives/edgar/data/934612/000119312523160840/d477190dfwp.htm

With an expected duration of claims at 4 years, I wouldn’t follow that strategy.

[gfp]

10 minutes ago, SafetyinNumbers said:

With an expected duration of claims at 4 years, I wouldn’t follow that strategy.

 

Different strokes for different folks.  I'd rather see some barbell like stuff than them buying forward contracts to lock in 3yr notes at 3.7 - 3.75% but they have a better track record than I do in the bond market.  I prefer the Berkshire method of sticking to t-bills but Fairfax takes a different approach.