Fairfax 2023

[Xerxes]

On 1/16/2023 at 7:50 PM, Viking said:

6.) FFH stock buybacks: it is a given Fairfax will buy back stock in 2023. I think a stock buyback of 500,000 shares is a good baseline number = 2% of shares outstanding. This is similar to where 2022 will likely come in. 

 

7.) buy back minority interests (Allied, Odyssey and Brit): Fairfax was very active on this front in 2022, spending $750million to buy back a significant chunk of Allied. My guess is we see another spend of $500-$750 million in 2023. 
- some on the board feel this activity is similar to Fairfax doing a buyback. It does result in Fairfax shareholders owning a larger share of Fairfax earnings. 

 

7) laser-guided precision buyback

 

6) B-52 carpet bombing buyback

 

[SafetyinNumbers]

2 hours ago, Viking said:

 

@gfp thanks for posting. Nice to see Fairfax getting some well served press. What I really liked about the article:

1.) it provides a concise, easy to understand history of Fairfax and bridges nicely to where the company is at today. This is not easy to do with Fairfax.

2.) identifies Fairfax as a GROWTH company. On this board we have done a good job of highlighting how cheap Fairfax is - looking at PE (about 6 x 2023 estimated normalized earnings) or P/BV (about 0.95 x Dec 31, 2022 estimated BV). 

 

Fairfax has grown like crazy. Over 9 years (2014-2023), a very long time, it has compounded net premiums at an incredible rate of 16% per year. Net premiums are up 300% over the past 9 years - from $6.1 billion to $24.6 billion in 2023 (my estimate). 

----------

And growth is one of the critical inputs in determining an appropriate P/BV multiple for insurance companies. The really interesting things with Fairfax is the growth of 16% per year HAS ALREADY HAPPENED. But it is not yet priced into the stock price.

 

That is a great set up for current shareholders. Multiple expansion will come... Mr. Market will eventually figure it out. 

 

And growing earnings + multiple expansion + lower share count = exceptional returns for investors.

 

It’s a really great piece and so is your writing Viking.

 

I would love if he had included some float analysis. FFH float to market cap ratio is so much higher than the public peers and it seems like investors stopped paying attention to float after such a long period of almost zero interest rates.

[Viking]

4 hours ago, SafetyinNumbers said:

It’s a really great piece and so is your writing Viking.

 

I would love if he had included some float analysis. FFH float to market cap ratio is so much higher than the public peers and it seems like investors stopped paying attention to float after such a long period of almost zero interest rates.

@SafetyinNumbers Zero interest rates impacted Fairfax more than peers over the past couple of years. That is because Fairfax has well below average duration (when compared to peers) on their bond portfolio. They were a freakish 1.2 years average duration at Dec 31, 2021. This means interest income was low and falling pretty dramatically the past couple of years. In short, Fairfax dramatically under-earned in interest income when compared to peers (and adjusting for size of portfolio) over the past couple of years. 
 

However, this is quickly reversing. And if interest rates stay higher for longer (allowing Fairfax to reinvest most of its low duration portfolio at much higher rates) then Fairfax could catch and pass some peers (in terms of total portfolio yield) in 2023. The ‘run rate’ for interest and dividend income was $950 million at Q2 and $1.2 billion in Q3. It will be very interesting to see what run rate they report for Q4. 
 

If Fairfax is able to get the interest yield on their $36 billion bond portfolio to something around 4% = $1.44 billion in interest income, then i think analysts and investors will start to drink the Fairfax Kool-Aid again. That would be US$60/share in just interest income. Nuts for a $600 stock. 

Edited January 18, 2023 by Viking

[MMM20]

10 hours ago, SafetyinNumbers said:

I would love if he had included some float analysis. FFH float to market cap ratio is so much higher than the public peers and it seems like investors stopped paying attention to float after such a long period of almost zero interest rates.

 

+1. Simple framework = ~$50B of assets roughly half of which are financed by float based borrowing at a negative 5% interest rate (using ~95% normalized combined ratio). That is huge. Buffett understood this 60+ years ago but many investors even BRK fans still don't really get it. It is much more of an advantage to borrow at -5% interest when regular old debt costs 6-8% and not ~1-3% or whatever it was at roughly 5,000 year lows!

 

Edited January 18, 2023 by MMM20

[Xerxes]

1 hour ago, MMM20 said:

 

+1. Simple framework = ~$50B of assets roughly half of which are financed by float based borrowing at a negative 5% interest rate (using ~95% normalized combined ratio). That is huge. Buffett understood this 60+ years ago but many investors even BRK fans still don't really get it. It is much more of an advantage to borrow at -5% interest when regular old debt costs 6-8% and not ~1-3% or whatever it was at roughly 5,000 year lows!

 

nice !

the “lost decade” was not just about the equity hedges. Also the abnormal interest rate regime. 
 

oddly enough, FFH feels like Microsoft out of its Steve Balmer era and into its third act. 

[SafetyinNumbers]

2 hours ago, Xerxes said:

nice !

the “lost decade” was not just about the equity hedges. Also the abnormal interest rate regime. 
 

oddly enough, FFH feels like Microsoft out of its Steve Balmer era and into its third act. 

plus FFH strategically used its paper when it was trading well above book to do insurance acquisitions which supercharged its float while no one cared about float. 

[glider3834]

[gfp]

436,777 shares on the open, similar to recent opening tick block trades

[StubbleJumper]

1 hour ago, gfp said:

436,777 shares on the open, similar to recent opening tick block trades

 

 

So, who has a quarter-billion dollars just laying around for a block trade like that?

 

 

SJ

[Santayana]

7 minutes ago, StubbleJumper said:

 

 

So, who has a quarter-billion dollars just laying around for a block trade like that?

 

 

SJ

Half that if I'm lucky.

[Crip1]

42 minutes ago, StubbleJumper said:

 

 

So, who has a quarter-billion dollars just laying around for a block trade like that?

 

 

SJ

Was thinking the exact same thing...

 

-Crip

[Viking]

Yesterday, I read Morningstar’s summary of their report for Fairfax. I thought what they wrote was pretty accurate. Just reading the Morningstar summary, an investor would be stupid to buy a share of Fairfax.

 

So why am I so bullish on Fairfax? Because I am focussed on the present and the future. Graham (the guy who taught Buffett) teaches us a stock is simply worth the present value of its future cash flows. Yes, the past matters... but what matters much more is the future. 

 

The Morningstar report is focussed pretty much solely on the past. And this is generally ok for most companies. But it does not work for companies where things have changed. Turnarounds. And lots of important things have changed at Fairfax over the past few years. Things that will have a big, positive impact on earnings in 2023 and future years.

 

This explains, at least partially, why it takes turnaround type stocks like Fairfax so long to re-rate. It takes years of excellent results before analysts and investors get comfortable that things have indeed changed in a sustainable way for the better. Only after the new and improved financial results are embedded in historical results will the ‘narrative’ change. This actually makes sense for a company like Fairfax that was so out of favour.

—————

So what is Morningstar missing in their report?

1.) Growth in net premiums written: this has grown at Fairfax over the past 8 years from $6 billion (2014) to estimated $22 billion (2022) for compounded growth of 17% per year. That is pretty impressive.

2.) Underwriting: While Fairfax did post a poor average CR of just under 100 over the 4 years from 2017-2020, over the past 9 years the average CR is 95.7. Importantly, the CR in 2021 was 95 and 2022 is estimated to come in around 95 as well. I would not call underwriting at a CR of 95 ‘relatively poor’ as Morningstar does.

3.) Increase in interest rates, how Fairfax was positioned, and the impact on interest income in 2022 and the future: Fairfax has a fixed income portfolio of $36 billion; as the insurance business has grown over the past 8 years so has the fixed income portfolio. As those of us on the board know, Fairfax took the average duration of their bond portfolio to 1.2 years at Dec 31, 2021. This caused interest income to fall dramatically in 2021. Who cares? Well, for those not paying attention, interest rates have spiked higher and this is… drum roll please… resulting in spiking interest income.

 

As a result, Fairfax is poised to deliver record underwriting profit ($1.1 billion) and record interest and dividend income ($1.4 billion) in 2023. $2.5 billion / 23.4 million shares  = US$107/share. Current stock price is US$600. They should earn even more in 2024.

 

The positioning of the duration of bond portfolio was an example of a ‘bold bet’ that is paying off exceptionally well for shareholders (driving billions in future value).

 

4.) ‘Watsa’s ability to produce alpha on the investment side’: Fairfax IS delivering alpha.

- share of profit of associates: will come in at a record $975 million in 2022 and $920 million in 2023 and future years.

- asset monetizations: pet insurance was just sold for close to $1 billion after tax gain. Resolute Forest Products was sold for $623 million (plus $183 million CVR). Ambridge Partners was just sold for $400 million.

 

Conclusion: Fairfax, as it exists today, is misunderstood. Most analysts and investors are stuck in the past. The good news is a stock is worth the present value of its future cash flows. And that is true for Fairfax.

 

So what is an investor to do? Patience and time. Fairfax needs to deliver results. The narrative will slowly change and reflect the current reality. And Fairfax shareholders should be rewarded handsomely.

—————-

Morningstar: While Its Primary Business Is Insurance, Fairfax Is in Some Ways More of an Investment Fund

 

“While its primary business is insurance, Fairfax is in some ways more of an investment fund. Chairman and CEO Prem Watsa has a history of bold investment bets and has shown a willingness to be unorthodox when it comes to portfolio construction. As a result, compared with other insurers, the company's results tend to be driven more by results on the investment side. We're somewhat skeptical of this approach, as we believe disciplined underwriting is a more maintainable path to long-term value creation, and Fairfax's underwriting record is relatively poor.

 

Fairfax collected a multibillion-dollar windfall during the financial crisis thanks to some large bearish bets but then remained cautious for many years afterward, resulting in weak overall results despite a significant improvement in underwriting performance over time. We think Fairfax's performance will continue to hinge on whether Watsa's investment theses play out, and the company has pivoted on this front.

 

Due to his bearish view, Watsa had fully hedged the company's still substantial equity portfolio in the post-crisis years. However, following the U.S. election of Donald Trump as president, Watsa did an about-face and banked on a strong equity market. Watsa’s optimism has largely worked to the company's advantage in recent years, but it has come with some volatility and the company essentially locked in the poor book value growth it had experienced through 2016. As the market turned in 2020, Fairfax went though a period of volatility but finished the year with a modest reduction in book value per share. During 2021, the company's bullish stance was a positive, before becoming a drag again in 2022.

 

We think investors attracted to the stock due to a belief in Watsa’s ability to produce alpha on the investment side should consider his record over the past decade, which includes some big wins but also substantial losses and missed opportunities. Fairfax has seen a lot of ups and downs, but since Watsa took control in the mid-'80s, its performance has been trending toward mediocrity.

 

In the near term, however, strong industry pricing should be a material tailwind for Fairfax and its peers.

Edited January 20, 2023 by Viking

[Parsad]

9 hours ago, gfp said:

436,777 shares on the open, similar to recent opening tick block trades

 

Probably some fund selling a stake after qualifying for the ex-dividend date and the recent run up.  Cheers!

[StubbleJumper]

7 hours ago, Parsad said:

 

Probably some fund selling a stake after qualifying for the ex-dividend date and the recent run up.  Cheers!

 

Well, that's the question, right?  We've seen several large-ish blocks over the past couple of weeks, and then that US$250m block yesterday.  So who was it?  Here are some of the large holders that I ripped off marketscreener.com :

 

 

 

Southeastern Asset Management, Inc.	3,263,193	13.1%
Mackenzie Cundill Investment Management Ltd.	2,595,071	10.4%
Mackenzie Financial Corp.	1,552,806	6.24%
Capital Research & Management Co. (Global Investors)	953,914	3.83%
Capital Research & Management Co. (World Investors)	923,500	3.71%
Vivian Watsa	794,534	3.19%
Edgepoint Investment Group, Inc.	745,908	3.00%
CI Investments, Inc.	624,985	2.51%
BlackRock Fund Advisors	604,897	2.43%
Davis Selected Advisers LP	596,671	2.40%

 

 

The number of candidates who had 400,000+ shares to sell is pretty small.  We can probably rule out "Vivian Watsa," better known to us as V. Prem Watsa.  So, any ideas? 

 

You figure that guys like Mason Hawkins would be selling?  When the Q4 numbers come out, what we will probably see is that adjusted BV (taking into account the deficiency of fair value over carrying value) will be roughly US$610.  Slice off the $10 divvy, and we're talking a current BV of ~US$600/share.  It seems overwhelmingly likely that FFH will make its 15% ROE target during 2023 as we know that there are significant gains to be booked, the fixed income port is finally kicking out some returns, and the underwriting market is fantastic.  BV as at Dec 31, 2023 will likely be right around US$700.  Even after the recent run-up, I just don't see the value guys selling at the current price of ~US$600.

 

Anyway, by my rough arithmetic, @gfp has flagged a series of block sales totalling ~1.2m shares at the bell over the past week or so.  Unless one of the larger holders both sold and bought back (ie, sell blocks totalling ~600k shares and then buy back the ~600k shares, thereby creating a total of 1.2m in block trades) it must be a very large holder.  It will be interesting to see if all of this quiets down a few days after the XD date (the div is for shareholders of record on Jan 19, so XD should have been Jan 17).

 

 

SJ

Edited January 20, 2023 by StubbleJumper

[gfp]

The way it lines up before and after the ex-dividend date I really do think these large crossed trades (without moving the price much) are just related to the behind the scenes positioning/hedging from the total return swaps.  

 

They aren't just sells - they is obviously a purchaser taking the other side.  Since the price was basically uneffected by each trade and they are privately negotiated and crossed at the opening, I don't think it is some big Fairfax investor selling out.  That wouldn't be done in such a dramatic way and it would effect the price.

 

We might find out later, if Fairfax says they closed out the total return swaps or converted some of them into actual repurchase and retirement.  Or someone might ask about it at the annual meeting and Prem might know some of the story.

 

But I do believe these trades are related to the TRS counterparties' hedging operations and not some big move by investors in the company.  And I think in retrospect the blocks will stop and we will see that it was only right before and right after the ex-dividend date.

[gfp]

This morning's opening trade was "only" 210,000 shares.

 

edit: you could see it lined up before hand, ready to go at an agreed upon price.

Edited January 20, 2023 by gfp

[gfp]

I had missed these filings showing Brian Bradstreet gobbling up Fairfax preferred shares in December -

https://www.canadianinsider.com/company-insider-filings?ticker=FFH

[MMM20]

15 hours ago, Viking said:

It takes years of excellent results before analysts and investors get comfortable that things have indeed changed in a sustainable way for the better. Only after the new and improved financial results are embedded in historical results will the ‘narrative’ change. This actually makes sense for a company like Fairfax that was so out of favour.

 

Couldn't agree more. Maybe FFH rerates to a market multiple once investors are smacked in the face by the fact that ~$100 '23 EPS actually should be a sustainable floor which should grow at a 10-15%+ CAGR from here with basic blocking and tackling... as you've laid out so well in your posts.

 

A market multiple is a ~$2000 stock a year or two out. Even a low teens P/E which would just put them in line with most other insurance cos is better than a double from here.

 

Still here for the ride.

 

Edited January 20, 2023 by MMM20

[StubbleJumper]

16 minutes ago, MMM20 said:

A market multiple is a ~$2000 stock a year or two out. Even a low teens P/E which would just put them in line with most other insurance cos is better than a double from here.

 

I hope you are correct, but I suspect you are wildly too enthusiastic.

 

Current adjusted BV is roughly US$600.  If all of the moons and stars align correctly, then perhaps the BV as at Dec 31, 2024 might be US$800.  Then if all of the moons and stars once again align perfectly, the market might re-rate FFH and you might get a price to book ratio of 1.5, which would get you a share price of US$1,200.  If I had to bet the over/under on that, I'd take the under because many things need to go perfectly for that scenario to come to pass.

 

We are in a situation that promises good returns for the next few years, but the math can only take us so far.

 

 

SJ

[MMM20]

1 hour ago, StubbleJumper said:

 

I hope you are correct, but I suspect you are wildly too enthusiastic.

 

Current adjusted BV is roughly US$600.  If all of the moons and stars align correctly, then perhaps the BV as at Dec 31, 2024 might be US$800.  Then if all of the moons and stars once again align perfectly, the market might re-rate FFH and you might get a price to book ratio of 1.5, which would get you a share price of US$1,200.  If I had to bet the over/under on that, I'd take the under because many things need to go perfectly for that scenario to come to pass.

 

We are in a situation that promises good returns for the next few years, but the math can only take us so far.

 

 

SJ

 

I've learned to focus more on sustainable earnings / cashflowing power than accounting book value, which has masked the underlying transformation at FFH for at least the past few years and frankly tells us little to nothing for most public companies nowadays. The pet insurance sale epitomizes that dynamic in FFH's case, doesn't it? But I get your point and understand that FFH investors tend to be old school book value / low accounting multiple value guys and so that's the way the market tends to price it, which might continue to put a cap on multiple expansion. I guess what that means to me is that FFH might just continue to trade too cheap vs the actual earnings power, which just means it ends up a long term hold compounder that might never hit fair value again. So maybe it trades at ~$2000 at ~8x '30 earnings in 6-7 years, at which point ~$4000 would be a lot fairer!? I hope so... but maybe you're right b/c I definitely do get way too bulled up sometimes.

 

Edited January 20, 2023 by MMM20

[A_Hamilton]

On 1/11/2023 at 7:01 PM, glider3834 said:

https://www.reinsurancene.ws/storm-elliott-to-have-limited-impact-on-lloyds-syndicates-argenta/

TRV reported $459 million in pre-tax losses from Elliott versus $305 million in Uri quarter.

ALL $779 million in Cat losses ($478 due to Elliott) versus $590 million for Uri. 

Hannover reported $190 million in losses versus $133 for Uri. 

 

I don't know how retentions have grown/ Hannover certainly has more NE exposure, but it seems this was a pretty big hit for the primary guys. 

[Parsad]

7 hours ago, StubbleJumper said:

 

Well, that's the question, right?  We've seen several large-ish blocks over the past couple of weeks, and then that US$250m block yesterday.  So who was it?  Here are some of the large holders that I ripped off marketscreener.com :

 

 

 

Southeastern Asset Management, Inc.	3,263,193	13.1%
Mackenzie Cundill Investment Management Ltd.	2,595,071	10.4%
Mackenzie Financial Corp.	1,552,806	6.24%
Capital Research & Management Co. (Global Investors)	953,914	3.83%
Capital Research & Management Co. (World Investors)	923,500	3.71%
Vivian Watsa	794,534	3.19%
Edgepoint Investment Group, Inc.	745,908	3.00%
CI Investments, Inc.	624,985	2.51%
BlackRock Fund Advisors	604,897	2.43%
Davis Selected Advisers LP	596,671	2.40%

 

 

The number of candidates who had 400,000+ shares to sell is pretty small.  We can probably rule out "Vivian Watsa," better known to us as V. Prem Watsa.  So, any ideas? 

 

You figure that guys like Mason Hawkins would be selling?  When the Q4 numbers come out, what we will probably see is that adjusted BV (taking into account the deficiency of fair value over carrying value) will be roughly US$610.  Slice off the $10 divvy, and we're talking a current BV of ~US$600/share.  It seems overwhelmingly likely that FFH will make its 15% ROE target during 2023 as we know that there are significant gains to be booked, the fixed income port is finally kicking out some returns, and the underwriting market is fantastic.  BV as at Dec 31, 2023 will likely be right around US$700.  Even after the recent run-up, I just don't see the value guys selling at the current price of ~US$600.

 

Anyway, by my rough arithmetic, @gfp has flagged a series of block sales totalling ~1.2m shares at the bell over the past week or so.  Unless one of the larger holders both sold and bought back (ie, sell blocks totalling ~600k shares and then buy back the ~600k shares, thereby creating a total of 1.2m in block trades) it must be a very large holder.  It will be interesting to see if all of this quiets down a few days after the XD date (the div is for shareholders of record on Jan 19, so XD should have been Jan 17).

 

 

SJ

 

The only one that would matter at all is if it was Prem selling.  Other than that...who really cares which fund was selling.  I didn't worry which one was buying when I bought (because most weren't buying), and I don't care which one was/is selling when they sell.  Cheers!

[gfp]

17 minutes ago, Parsad said:

 

The only one that would matter at all is if it was Prem selling.  Other than that...who really cares which fund was selling.  I didn't worry which one was buying when I bought (because most weren't buying), and I don't care which one was/is selling when they sell.  Cheers!

 

But I do care if it is Fairfax closing out their total return swaps for cash profits or somehow converting them into repurchased and cancelled shares.  

 

Nobody really thinks this is a fund buying or selling their investment in Fairfax shares.  It wouldn't look like that.

[StubbleJumper]

40 minutes ago, gfp said:

Nobody really thinks this is a fund buying or selling their investment in Fairfax shares.  It wouldn't look like that.

 

There is always a possibility that a US based fund is subject to the Government of Canada's withholding tax on dividends and has elected to temporarily sell a large position to some other fund with more favourable tax treatment, and is now re-purchasing those shares since it is trading XD.  Usually, we should expect to see the share price drop about US$10 when it trades XD, and that actually happened on Wednesday, Thursday, and at the bell this morning.  If somebody was doing that sale and repurchase trick, I hope they've already completed their transactions because they'd get screwed at this afternoon's prices.

 

 

SJ

[Parsad]

4 hours ago, gfp said:

 

But I do care if it is Fairfax closing out their total return swaps for cash profits or somehow converting them into repurchased and cancelled shares.  

 

Nobody really thinks this is a fund buying or selling their investment in Fairfax shares.  It wouldn't look like that.

 

Highly unlikely it's Fairfax, unless they plan on using the funds to buy back part of their other insurance businesses that aren't wholly-owned or they are acquiring another insurance business.  

 

When Prem mentioned that $1000 price per share, he wasn't being facetious.  He thinks it's reasonable, and it certainly seems like from the insurance business and higher interest income alone, they would be on pace to hit that in the next year or two.  The swaps would be worth considerably more...so unless there is a better alternative, they aren't selling them yet. 

 

Cheers!