Fairfax 2023

[Haryana]

34 minutes ago, dartmonkey said:

 

Yes, of course you are right, I just used the same dates that Brooklyn Investor used to show that Berkshire is the real thing, the Berkshire wannabees are also-rans. I just wondered if that particular fairly non-natural 11.5y period might have been not quite so bad, if one counted dividends. The answer is no, it takes us from 4.6 to 6.9% annualized, still a long way from Berkshire's 13.9%.

 

Of course Fairfax looks a lot better if you include the big macro bet put on before the global financial crisis that paid off handsomely. And the period chosen is the almost the worst imaginable period for Fairfax, beginning about the same time as the catastrophic shorting adventure. hopefully behind us now forever. Going back a bit farther, things are not so bad. And also, hopefully, going forwards a bit farther will do the same trick...

 

You are right, I understand what you were doing there. Just like to point out that a change of annualized return rate from 4.6% to about 7% is huge on its own even if it looks less so when compared to some other larger number like 14%.

 

Also, to point out, even though a start of 2006-end includes the winning macro bet before 2008, it still includes all of the losing shorting bet and thus the 2006-end can be argued to be a far more neutral starting point than the 2011-end.

 

Overall, nobody knows the future but the point is to show how easy it is for the masses to be fooled by the numbers.

 

[Madpawn]

On 7/10/2023 at 2:40 PM, Viking said:

@newtovalue i have not done a Q2 estimate yet. I will put something together before they report. The problem i am having is understanding the impact of much higher interest rates and IRFS 17. Any insight other posters have on interest rate changes and impact on IFRS 17 would be appreciated  
 

 

I remember seeing you post in recent days that your portfolio is about 35% Fairfax. May I ask if that includes FIH? I'm surprised FIH is not getting nearly as much attention as FFH does.

[Viking]

41 minutes ago, Madpawn said:

I remember seeing you post in recent days that your portfolio is about 35% Fairfax. May I ask if that includes FIH? I'm surprised FIH is not getting nearly as much attention as FFH does.

@Madpawn my holding as of today is 100% Fairfax. I just added to Fairfax when it went under C$960. I prefer to primarily hold Fairfax today given how cheap i think it is (and i am way overweight). I have held Fairfax India in the past (i recently sold my small remaining position at just just under $14), and sometimes large stakes. But i use it more as a trading vehicle. That works when a stock moves in a sideways band (like Fairfax India has been the past couple of years). But if/when it pops higher then i am toast. I often get too cute with situations like Fairfax India.
 

Fairfax India is unambiguously cheap. And the potential catalysts are there (big undervaluation, holdings are performing well, BIAL is a jewel/trophy asset, management buying back stock, Anchorage IPO, general interest in India). It has a very good management team. The stock is bumping up against $14, so someone is buying… If it sold off I likely would add back. But it would not surprise me to see the stock just keep powering higher.

Edited July 12, 2023 by Viking

[newtovalue]

On 7/10/2023 at 2:40 PM, Viking said:

@newtovalue i have not done a Q2 estimate yet. I will put something together before they report. The problem i am having is understanding the impact of much higher interest rates and IRFS 17. Any insight other posters have on interest rate changes and impact on IFRS 17 would be appreciated  
 

 

Ty as always! I unfortunately have no understanding about IFRS 17 - but look forward to what the other brilliant members of this board are able to add

[MMM20]

13 hours ago, Haryana said:

Overall, nobody knows the future but the point is to show how easy it is for the masses to be fooled by the numbers.

 

Whenever you see a comparison over some specific and arbitrary time horizon rather than something like rolling 3-/5-/10-year periods, you should squint your eyes a little and wonder why they picked that specific period.

 

I think that's a useful thing for every investor to understand and apply across the board.

 

Edited July 12, 2023 by MMM20

[SafetyinNumbers]

18 hours ago, dartmonkey said:

 

Yes, of course you are right, I just used the same dates that Brooklyn Investor used to show that Berkshire is the real thing, the Berkshire wannabees are also-rans. I just wondered if that particular fairly non-natural 11.5y period might have been not quite so bad, if one counted dividends. The answer is no, it takes us from 4.6 to 6.9% annualized, still a long way from Berkshire's 13.9%.

 

Of course Fairfax looks a lot better if you include the big macro bet put on before the global financial crisis that paid off handsomely. And the period chosen is the almost the worst imaginable period for Fairfax, beginning about the same time as the catastrophic shorting adventure. hopefully behind us now forever. Going back a bit farther, things are not so bad. And also, hopefully, going forwards a bit farther will do the same trick...

They also started that period trading at the same P/B multiple but Fairfax’s multiple down by almost 30% and BRK’s went up by an identical amount. I showed that makes up most of the difference between the two returns. I also think most of Fairfax’s positions are further away from intrinsic value so perhaps the return are even closer than they look when normalized.

 

I think the exercise is interesting to show that Fairfax fundamental performance wasn’t as bad as the stock would suggest and that’s the margin of safety/opportunity now.

 

The blog chose that date because that’s when it started. 

[Haryana]

 

I would use 03-2003 as the start date if I wanted to showcase Fairfax -

 

[Crip1]

On 7/12/2023 at 9:01 AM, MMM20 said:

 

Whenever you see a comparison over some specific and arbitrary time horizon rather than something like rolling 3-/5-/10-year periods, you should squint your eyes a little and wonder why they picked that specific period.

 

I think that's a useful thing for every investor to understand and apply across the board.

 

+1 (actually, I'd plus more than one if it was possible)

 

-Crip

[Haryana]

On 7/12/2023 at 1:02 PM, Haryana said:

 

I would use 03-2003 as the start date if I wanted to showcase Fairfax -

 

Someone chooses their chart start date based on their blog date.
I choose March 2003 as my chart start because that is about when I left New York!

Now, when I look at that chart, there is a certain feeling of pity and sympathy for Berkshire.
Certainly, they can get a participation certificate, a consolation prize of sorts because they "also ran".

But, just look at that growing gap, how this thing keeps falling more and more far behind throughout, oh my, what a dog!

 

[Viking]

As we begin Q3, this is a good time to update earnings estimates for Fairfax for 2023. And look ahead to 2024. I am also going to take a stab at 2025. I don’t like to go much beyond 2 years with earnings estimates - there are simply to many moving parts. But it useful to get a three year view on earnings to better be able to value the stock price today - so lets give it a shot.

 

My first big learning has been: the GIG acquisition is going to be a material development for Fairfax when it closes. I need to get up to speed with GIG (I may need to revise my estimates below).

 

Please chime in with your thoughts. Too optimistic? Too pessimistic? Any thoughts on what GIG is going to deliver?  What important things are missing? Please get into the weeds.

 

Conclusion:

 

Let's skip ahead to the conclusion. My estimate is Fairfax will earn about $140/share, on average, over the next three years. I consider this to be a mildly conservative estimate - what i mean by that is i think it is more likely that earnings will come in higher than lower.

 

The big ‘miss’ with my estimates is capital allocation. We don’t know much of what the management team at Fairfax is going to do with all the earnings (around $3.2 billion) coming each of the next 3 years. Looking at the last 5 years, the management team has been best-in-class with capital allocation. My guess is they will continue to make good decisions (on balance) and this will benefit shareholders - providing a tailwind to my forecast.

 

I am also assuming interest rates remain roughly at current levels. Of course this will not be the case. But if rates rise - or go lower - Fairfax will have lots of puts and takes. I am also forecasting no impact from IFRS 17 (as I have stated before, I am still learning how this accounting change affects Fairfax’s reported results over time.)

 

I love the following 8-year snapshot of Fairfax. It communicates really well the dramatic transformation that has happened at the company beginning in 2021. It is a pretty amazing story.

 

 

What are the key assumptions?

 

1.) underwriting profit to be flat to slightly down. Estimates for both premium growth and CR are conservative.

• When the GIG transaction closes (Q4?) Fairfax will be getting a big boost to its insurance business. I think GIG might be adding $1.8 billion to net written premiums. GIG is the driver to top line growth of 8% in 2024. If the hard market continues into 2024 then top line growth at Fairfax will likely be +10%.
• I am forecasting Fairfax’s CR to increase from 94.7 in 2022 to 96 in 2025. Do I think this will happen? No. My guess is they will continue to deliver a 95 CR - until I learn something that tells me something new.
• The hard market will end at some point. But do things quickly turn ugly? Probably not, but not sure.

 

 

2.) interest and dividend income: Will increase modestly. Extending the average duration of the fixed income portfolio to 2.5 years largely locks in these numbers.

 

Tailwinds:

• GIG: will add about $2.4 billion to total investment portfolio. At estimated total return of 4.5% = $110 million. I expect the majority of this would be interest income.
• PacWest loans: $100 million incremental ($200 million total) to interest income? Half in 2H, 2023 and half in 1H, 2024. 
• Eurobank: likely dividend starting in 2024 = $60 million?

Headwind:

• Short term treasury rates likely come down lowering interest on cash/short term balances.

 

3.) Share of profit of associates: Will increase modestly. It fell in 2023 because of the sale of Resolute Forest Products - who contributed $159 million in 2022.

• GIG purchase will subtract $80 million in 2024 (same as what is built in for 2023).
• growing earnings at Eurobank and Poseidon/Atlas will power this higher. My estimates for Stelco and EXCO are very conservative (a combined total of $110 million per year).

 

 

4.) Effects of discounting and risk adjustment (IFRS 17). Interest rate changes drive this bucket. I need time to learn how much. Given I am forecasting interest rates to remain about where they are today I am leaving this number the same over the forecast period.

 

5.) Life insurance and runoff. This combination of business lost $167 million in 2022. I am forecasting this bucket to lose $175 million in each of the next three years. We should expect Eurolife to grow its earnings nicely over time.

 

6.) Other (revenue-expenses): improving results from consolidated holdings.

 

In the near term, perhaps we get write downs in both Boat Rocker and Farmers Edge. Recipe should deliver solid and growing earnings of better than $100 million per year. Earnings at Dexterra are growing again. AGT is a sleeper holding. Grivalia Properties is in its peak investment phase; earnings should grow nicely looking out a year or two. This bucket could really start to shine through for Fairfax in the coming years.

 

7.) Interest expense: modest increase.

8.) Corporate overhead and other: took the average of last 3 years and added 10%

 

9.) Net gains on investments: This is a wild card.

 

My estimates assume:

• mark-to-market equity holdings of $7.8 billion increase in value by 10% per year = $800 million.
• there is a small bump of $200-$300 million per year in additional gains (equities and fixed income).

Total return on investment portfolio is:

• 2023 = 7.5%
• 2024 = 6.8%
• 2025 = 7.0%

(I get this by adding up the following line items: 2.) + 3.) + 6.) + 9.) and divided the total by the value of their investment portfolio).

 

These percent returns, while high compared to recent years, are hardly heroic given Fairfax is currently earnings about 4% on their fixed income portfolio.

 

10.) Gain on sale/deconsol of insurance sub: this is where I put the really large monetizations. 2022 was the sale of pet insurance and Resolute. 2023 was the sale of Ambridge and the purchase of GIG (resulting in a write up of the existing holding).

 

I am building in nothing for 2024 and 2025 and this is highly unlikely.

• We likely will get a Digit IPO at some point over the next year and this could result in a significant gain for Fairfax.
• We could get an event that triggers a revaluation of Eurobank (carrying value is currently $500 million below market value and this will likely widen significantly in the coming years).
• We could see an AGT IPO.
• Fairfax is likely to sell another large holding for a significant gain.

Bottom line, this is probably where I will be most wrong with my forecast. Developments here will have a material positive impact to Fairfax’s reported results (earnings and book value).

 

11.) Income taxes: estimated at 19%

12.) Non-controlling interests: estimated at 11% (not really sure)

 

13.) Shares Outstanding: reduced by 500,000 per year. This is in line with a normal year from Fairfax. It would not surprise me to see Fairfax do one more big repurchase to take advantage of the low share price while it lasts.

Edited July 14, 2023 by Viking

[Viking]

As i mentioned in my previous post, the closing of the Gulf Insurance Group (GIG) deal (Q4?) - boosting Fairfax’s ownership to 90% - will be an important growth driver of Fairfax’s 2024 results. 
 

GIG recently updated their web site. They added a bunch of new information. Below is the link to a 40 page report that provides a great overview of the company.

- https://www.gulfinsgroup.com/Frontend/EN/GIG-Corporate-Profile-ENG.pdf?download=false

 

Here are the financial highlights (2022):

• Net premiums written = $1.7 billion
• Underwriting surplus = $164 million
• Total Investments = $2.4 billion
• Shareholders equity = $748 milion
• Net profit = 125 million (Q1, 2023 = $34 million)

The purchase price of the 46% owned by Kipco is $860 million. However, the true cost to Fairfax is far less, due to the time value of money. Fairfax will pay $200 million at close and then 4 annual instalments of $165 million. If we use an 10% discount rate, the cost to purchase Kipco’s stake when it closes in Q4 is closer to $700 million ($200+$149+$134+$120+$108).
 

This is a good example of solid capital allocation on the part of Fairfax. They are paying a premium for quality. That is interesting. They are also playing the long game with this purchase as it is a very strategic purchase for them that solidifies their presence in the MENA region. It is also anther example of using their current robust cash flow to take out a partner in a business they understand very well.

 

Edited July 14, 2023 by Viking

[glider3834]

43 minutes ago, Viking said:

As i mentioned in my previous post, the closing of the Gulf Insurance Group (GIG) deal (Q4?) - boosting Fairfax’s ownership to 90% - will be an important growth driver of Fairfax’s 2024 results. 
 

GIG recently updated their web site. They added a bunch of new information. Below is the link to a 40 page report that provides a great overview of the company.

- https://www.gulfinsgroup.com/Frontend/EN/GIG-Corporate-Profile-ENG.pdf?download=false

 

Here are the financial highlights (2022):

• Net premiums written = $1.7 billion
• Underwriting surplus = $164 million
• Total Investments = $2.4 billion
• Shareholders equity = $748 milion
• Net profit = 125 million (Q1, 2023 = $34 million)

The purchase price of the 46% owned by Kipco is $860 million. However, the true cost to Fairfax is far less, due to the time value of money. Fairfax will pay $200 million at close and then 4 annual instalments of $165 million. If we use an 10% discount rate, the cost to purchase Kipco’s stake when it closes in Q4 is closer to $700 million ($200+$149+$134+$120+$108).
 

This is a good example of solid capital allocation on the part of Fairfax. They are paying a premium for quality. That is interesting. They are also playing the long game with this purchase as it is a very strategic purchase for them that solidifies their presence in the MENA region. It is also anther example of using their current robust cash flow to take out a partner in a business they understand very well.

 

good point viking on PV of this transaction

 

I would expect it would be a net positive for Fairfax's underwriting profitability & overall CR

 

[SafetyinNumbers]

2 hours ago, Viking said:

As i mentioned in my previous post, the closing of the Gulf Insurance Group (GIG) deal (Q4?) - boosting Fairfax’s ownership to 90% - will be an important growth driver of Fairfax’s 2024 results. 
 

GIG recently updated their web site. They added a bunch of new information. Below is the link to a 40 page report that provides a great overview of the company.

- https://www.gulfinsgroup.com/Frontend/EN/GIG-Corporate-Profile-ENG.pdf?download=false

 

Here are the financial highlights (2022):

• Net premiums written = $1.7 billion
• Underwriting surplus = $164 million
• Total Investments = $2.4 billion
• Shareholders equity = $748 milion
• Net profit = 125 million (Q1, 2023 = $34 million)

The purchase price of the 46% owned by Kipco is $860 million. However, the true cost to Fairfax is far less, due to the time value of money. Fairfax will pay $200 million at close and then 4 annual instalments of $165 million. If we use an 10% discount rate, the cost to purchase Kipco’s stake when it closes in Q4 is closer to $700 million ($200+$149+$134+$120+$108).
 

This is a good example of solid capital allocation on the part of Fairfax. They are paying a premium for quality. That is interesting. They are also playing the long game with this purchase as it is a very strategic purchase for them that solidifies their presence in the MENA region. It is also anther example of using their current robust cash flow to take out a partner in a business they understand very well.

 

 

Great posts as always Viking! Thank you! 
 

I like that GIG might earn the entirety of the instalment payments over the payment period. 
 

I really appreciate how cleverly they structure deals. Fairfax has so much leverage that just earning the risk free rate on extra capital supports a 15% ROE. Anything that defers payments like GIG or the TRS is hugely accretive.

[newtovalue]

thank you for detailed analysis Viking!

 

Does anyone on the board have insight into FFH's hurricane exposure? a few articles bubbling up about this year being active for hurricanes

[Haryana]

4 hours ago, newtovalue said:

thank you for detailed analysis Viking!

 

Does anyone on the board have insight into FFH's hurricane exposure? a few articles bubbling up about this year being active for hurricanes

https://www.businessinsider.com/personal-finance/homeowners-insurance-made-hurricane-season-florida-less-stressful-2023-7

No particular insight into FFH's hurricane exposure but it is likely nothing to see there, business as usual.

Hurricane fears will keep bubbling every year, some years they will underestimate, some years overestimate.

Those fears can present more opporutunities to get more in on the asset when their stocks gets depressed.

Similar to tobacco companies, the demand for insurance is inelastic. People will pay regardless of price.

Governments keep increasing taxes on tobacco and the hurricanes keep getting worse due to climate change.

Both the tobacco companies and the insurance companies keep increasing their prices, revenues and profit.

For insurance companies there is the added advantage of increasing float and increasing investment gains.

[gfp]

I'm not sure comparing the pricing power of tobacco companies with the pricing power of insurance companies is as simple as that.  Insurance companies are price takers, despite the current point in the cycle making it look otherwise to some.

[Haryana]

 

You are correct. That was an oversimplification and the comparison is quite far fetched. Still, a point to ease the fears.

 

Insurance companies are price takes, however, the worse the hurricanes, the higher the prices they all shall be taking.

 

Here again, the management becomes more important, companies with better management will get extra advantage.

 

[Haryana]

 

I never like articles on the Motley Fool but this one is a bit better.

 

https://www.fool.ca/2023/07/12/prem-watsa-is-back-why-fairfax-financial-stock-has-room-to-run/

 

"Investors getting in at these prices may need to roll with the punches, even if the stock is overdue for another one of its 10% dips. In any case, Prem Watsa has proven that he still has plenty of skill. And as a recession comes rolling in, expect Fairfax to roll with the punches. Fairfax and Watsa are back, and investors should really take notice, even if shares are near an all-time high."

 

[Thrifty3000]

@Viking

 

Amazing analysis. You’re a saint for doing this.

 

You mentioned your “big ‘miss’ is related to capital allocation”.
 

If we assume they will net $9.5 billion over the next 3 years, then it looks to me like at least half of that is already earmarked for things like:

 

- buying out the minority stakes of some of their existing portfolio companies.

- retention/reinvestment by associates.

- paying common share dividends.

- buying GIG.

 

After paying for the fairly easily predictable items like those above, what do we have left, maybe $3 or $4 billion?

 

If they buy back another 1.5 million shares at an average price of $900 per share, then we’re looking at another $1.35 billion spend.

 

I don’t think there is too much to be concerned about with the uses listed so far.

 

So, I assume that leaves them with maybe a couple billion dollars to play with over the next 3 years for which we can’t easily predict the use. That’s where the fun stuff happens.

 

Edited July 16, 2023 by Thrifty3000

[Xerxes]

https://podcasts.apple.com/ca/podcast/the-business-brew/id1540847053?i=1000621753971
 

[Jaygo]

Kiss of death, sorry BB if your on here lol

[SafetyinNumbers]

2 hours ago, Xerxes said:

https://podcasts.apple.com/ca/podcast/the-business-brew/id1540847053?i=1000621753971
 

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! 

[Xerxes]

59 minutes ago, 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! 

@SafetyinNumbers

thanks for taking the time in making the episode. I ll be listening to it soon. 
 

@Jaygo

lol … BB is doing way more than me connecting the investment community. So I ll give him that. 

[Jaygo]

Yeah he is doing great work and I am a fan of his show. Frankly i should have not said that. If you can’t say something nice, don’t say anything at all! 
 

I guess I kind of see podcasts as a placeholder for what’s hot and popular. BB has a discussion about FFH and it coincides with lots of COBF member buying FFH

 

It’s was energy last year and lumber the year before. 

[SafetyinNumbers]

1 hour ago, Jaygo said:

Yeah he is doing great work and I am a fan of his show. Frankly i should have not said that. If you can’t say something nice, don’t say anything at all! 
 

I guess I kind of see podcasts as a placeholder for what’s hot and popular. BB has a discussion about FFH and it coincides with lots of COBF member buying FFH

 

It’s was energy last year and lumber the year before. 

Thankfully, Fairfax is not a commodity but that still doesn’t mean we won’t have another drawdown at any moment. Investing to avoid drawdowns is hard and I think it’s part of the reason we are stuck near a $1000. Today was the 6th time through. Maybe the sellers are finally done or we’ll chop away all summer. Ultimately, it shouldn’t matter in the long term.