Fairfax 2023

[Munger_Disciple]

Thanks @Parsad! That was very helpful. 

[MMM20]

Does this apparent elasticity of demand make a dent in the hard market? The beginning of the end?
 

https://www.wsj.com/personal-finance/americans-are-bailing-on-their-home-insurance-e3395515
 

Homeowners are increasingly forgoing home insurance, gambling that the likelihood of a disaster isn’t high enough to justify the cost of a policy. Some skipping insurance say they are doing so because they can no longer afford the rising premiums. The national average for home insurance based on $250,000 in dwelling coverage increased this year to $1,428 annually, up 20% from 2022, according to Bankrate. 

…

Twelve percent of homeowners in the U.S. don’t purchase homeowners’ insurance. About half of them have annual household incomes of less than $40,000, according to a 2023 survey by Insurance Information Institute, an industry trade group, and the reinsurer Munich Re.

…

People with money are finding ways around the problem.

A client of Angie Newman in coastal Florida figured that the total cost of replacing his vacation home and all of its contents would be about $1.5 million. His longtime insurer recently didn’t renew his policy. The only remaining insurer in the area was offering a policy with flood insurance for about $17,000 a year, up from about $7,000 a year that he paid previously, says Newman, a financial adviser at UBS Financial Services in Florham Park, N.J.

The client separated the possible costs of repairs and rebuilding from his other investible assets and invested the funds instead. 

He assumed he could make an average return of about 6% on the roughly $1.5 million while waiting for some other insurers to re-enter the market, Newman says. 
 

 

Edited August 28, 2023 by MMM20

[gary17]

On 8/25/2023 at 1:56 AM, Viking said:

Here is some constructive feedback:

1.) my guess is Fairfax earns $160/share in 2023. That is a 5.2 PE. I expect earnings per share to grow in 2024 and 2025. So Macy’s is not cheaper today.

2.) liquidation value. My guess is if Fairfax started to sell off its many assets it would realize significant value for shareholders. Of course that isn’t going to happen so it is kind of a useless exercise. My question: is Macy’s going to liquidate parts of the company?

3.) management: the management team at Fairfax has been executing exceptionally well the past 5 years (best in class among insurance companies). They are going to be getting in the range of another $11.3 billion in net earnings over the next 3 years. I have no idea how good the management team at Macy’s is… but are they that good?

4.) insurance is in a hard market. Retail is… in a terrible market that might get worse ( although i did buy a little Aritzia recently).

 

Sanjeev, my read is you are significantly underestimating the current earnings power of Fairfax - like many of the posters on this board. And i love it. Stocks usually climb the wall of worry.

 

PS: i will admit i do not follow Macy’s… but i will do some reading on the weekend. Your banging of the table is what got me back into Fairfax in late 2020. And more recently you nailed META.

 

Quote

 

 

hi Viking - thanks for all this. makes sense.

For me FFH is cheap, but it does seem like they earn a low return on invested capital; they are only showing decent return on equity because it's a leveraged business. my high level observation.

Gary

 

[MMM20]

On 8/28/2023 at 2:14 PM, gary17 said:

they are only showing decent return on equity because it's a leveraged business

 

True, but you could've said the same think about BRK for many decades. The critical point that can't be emphasized enough (I've tried) is that insurance float is very different than broker margin or even corporate credit. It's a sustainable source of free or negative cost (or even just plain cheap) leverage, even through drawdowns that might blow up a bank or hedge fund, as long as they can underwrite to breakeven or better (or even a little worse) through cycles. Rather than a negative thing, what you're pointing out is a (maybe *the*) major structural advantage from the POV of a long term FFH equity investor, and even more of an absolute and relative advantage now than a few years ago with 1) so much more of it, in the wake of smart growth ahead of and into the hard market, and 2) borrowing costs otherwise off the lower bound.
 

IMHO that *highest quality* leverage is the overarching reason why FFH has been and should continue to be a compounder… and a still misunderstood one still trading at 5-6x sustainable (though, yes, volatile) earnings.

 

That's my elevator pitch at least. Sorry, I can't help but chime in b/c this is my favorite subject.

 

Edited August 30, 2023 by MMM20

[gary17]

1 hour ago, MMM20 said:

 

True, but you could've said the same think about BRK for many decades. The critical point that can't be emphasized enough (I've tried) is that insurance float is very different than broker margin. It's a sustainable source of free or negative cost (or even just plain cheap) financing, even through drawdowns that might blow up a bank or hedge fund, as long as they can underwrite to breakeven or better (or even a little worse) through cycles. Rather than a negative thing, what you're pointing out is a (maybe *the*) major structural advantage from the POV of a long term FFH equity investor, and even more of an absolute and relative advantage now than a few years ago with 1) so much more of it, in the wake of smart growth ahead of and into the hard market, and 2) borrowing costs otherwise off the lower bound.
 

IMHO that *highest quality* leverage is the overarching reason why FFH has been and should continue to be a compounder… and a still misunderstood one that just happens to still be trading at 5-6x sustainable (though, yes, volatile) earnings.

 

That's my elevator pitch at least. Sorry, I can't help but chime in b/c this is my favorite subject.

 

MMM20, thanks, i totally get what you are saying.  The cheap cost of capital is an advantage.  I just wish they could get even higher returns for the cheap capital they can get - but I guess the nature of insurance business is such that they can only invest in certain types of securities / fixed income for when there's a payout. I think higher valuation could come when they start transforming to be more like Berkshire with wholly owned subsidiaries.

Gary

Edited August 28, 2023 by gary17

[Viking]

1 hour ago, gary17 said:

 

hi Viking - thanks for all this. makes sense.

For me FFH is cheap, but it does seem like they earn a low return on invested capital; they are only showing decent return on equity because it's a leveraged business. my high level observation.

Gary

 

@gary17 i have a question for your. Lets pretend Fairfax delivered an ROE of 15% per year on average for the past 5 years. This year they are on track to deliver an ROE of around 19%. Prospects for 2024 and 2025 look good (mid teens ROE). What multiples (PE and P/BV) would be reasonable to pay today?

Edited August 28, 2023 by Viking

[StevieV]

3 hours ago, MMM20 said:

3 hours ago, MMM20 said:

People with money are finding ways around the problem.

The client separated the possible costs of repairs and rebuilding from his other investible assets and invested the funds instead. 

He assumed he could make an average return of about 6% on the roughly $1.5 million while waiting for some other insurers to re-enter the market, Newman says. 

 

It's a stretch to call this finding a way around the challenge of increasing insurance rates.  It is simply choosing to forego insurance.  "Instead" of buying insurance, the homeowner will pay for a rebuild out of pocket if something happens.  Those are typically the two options.

Edited August 28, 2023 by StevieV

[Munger_Disciple]

34 minutes ago, StevieV said:

 

It's a stretch to call this finding a way around the challenge of increasing insurance rates.  It is simply choosing to forego insurance.  "Instead" of buying insurance, the homeowner will pay for a rebuild out of pocket if something happens.  Those are typically the two options.

 

If the homeowner carries a mortgage, he is required to purchase homeowner insurance. 

[Thrifty3000]

35 minutes ago, StevieV said:

 

It's a stretch to call this finding a way around the challenge of increasing insurance rates.  It is simply choosing to forego insurance.  "Instead" of buying insurance, the homeowner will pay for a rebuild out of pocket if something happens.  Those are typically the two options.

People who have mortgages or loans against their property will be required by the lender to have insurance. Only people who own property free and clear will be able to self insure.

[gary17]

20 minutes ago, Viking said:

@gary17 i have a question for your. Lets pretend Fairfax delivered an ROE of 15% per year on average for the past 5 years. This year they are on track to deliver an ROE of around 19%. Prospects for 2024 and 2025 look good (mid teens ROE). What multiples (PE and P/BV) would be reasonable to pay today?

 

If I was any good i wouldn't be on this forum all the time for great insight from the smart people ! lol   

for me i think because FFH is trading close to book, so ROE is also close to return on my investment.  If it's a stable business and the prospects are good, i think i'd be happy to pay at least 8- 10x or whatever the market is at.  I've found over the years paying market price for good business worked out just fine.

At 8-10x, that'd make this $1280 - $1600usd/share - and by that measure FFH is certain under-valued.

I am not sure what  the market is also factoring in, but perhaps the cost of borrowing for the investors - if one can get 4 - 5% from fixed income, certainly reduces appetite for stocks. Also opportunity cost of what else is in the investment universe .  And perhaps the market is still waiting to be convinced the underlying investment philosophy - the lost decade - won't be repeated.  

 

 

[gary17]

Just to clarify, the 8x to 10x = 10% ~ 12.5% return on investment  for me - and i think that's OK given the risk free rate is around 5% - so demanding another 5 % - 7% return on the risks.

 but clearly it's not trading at 8x - 10x; it's trading at 5.5x or 18% ROI.  So market is pricing the risk at mucher than my 5 - 7%. So the market may know something i don't.

[Parsad]

On 8/27/2023 at 8:15 PM, Parsad said:

 

Yes, Hamblin-Watsa is completely owned by Fairfax and their investment advisory arm for Fairfax's portfolio.

 

I believe Prem and his wife Nalini control almost 70% of Sixty-Two...maybe more now.  The Watsa Family will retain control over Sixty-Two and Fairfax long-term. 

 

Prem and Nalini aren't big on passing on large amounts of inherited wealth.  I imagine, not unlike Buffett and his ownership of Berkshire, Nalini will probably pass most of the ownership of Fairfax to their foundation...The Sixty-Three Foundation through which they do their family donations. 

 

The Watsa children and probably Prem & Nalini's grand-children, alongside their advisory board, will be long-term stewards of The Sixty-Three Foundation and indirectly Fairfax.  So the family culture will remain with Fairfax for many, many decades!

 

Cheers! 

 

Thanks to Kyle Holmes for confirming from the 1992 FFH Letter that Prem owns 100% of Sixty-Two since buying out the minority shareholders in 1992.  For some reason, I thought he increased his stake to 70%+, but he bought control of the whole entity.  Cheers!

[John Hjorth]

On 8/28/2023 at 2:02 AM, Parsad said:

... I believe the story is in the 25th Anniversary Book. ...

 

Kicking in a tiny footnote here. This must be the first time I have been made aware of the existence of this book! - at least I think so!

 

Anyone here on CoBF being lucky enough to own a specimen?

 

Found this in the 2010 Letter [issued in 2011] mentioning the book :

 

Quote

... You can see why we are so grateful for this performance and deeply humbled, given all the challenges we faced over this time period. We particularly want to thank our long term shareholders who have supported and encouraged us throughout this extraordinary journey. We have published a small book, “The First 25 Years of Fairfax”, written by journalist Ron Graham, based on a series of interviews. We hope you enjoy reading our story – a copy will be given to all attendees at ours hareholders’ meeting on April 20, 2011. ...

 

Also, then found this!

 

- - - o 0 o - - -

 

Now this "must have" urge starts kicking in at me! 

[MMM20]

On 8/28/2023 at 4:05 PM, StevieV said:

 

It's a stretch to call this finding a way around the challenge of increasing insurance rates.  It is simply choosing to forego insurance.  "Instead" of buying insurance, the homeowner will pay for a rebuild out of pocket if something happens.  Those are typically the two options.

 

I think it's fair to call it a workaround, just not a scalable one. Few people are in a position to just set aside an extra ~$1.5mm (or even $500K or whatever) and essentially self-insure. That's the whole point of insurance! It just gets scary when people with zero savings can't or won't get coverage for whatever reason. If that piece grows, the whole system becomes a bit more fragile, and maybe it's a sign that rates are becoming a bit stretched.

 

Edited August 30, 2023 by MMM20

[TwoCitiesCapital]

12 hours ago, John Hjorth said:

 

Kicking in a tiny footnote here. This must be the first time I have been made aware of the existence of this book! - at least I think so!

 

Anyone here on CoBF being lucky enough to own a specimen?

 

 

 They gave them out at the annual meeting a several years back. If you didn't attend in person, I don't think you'd have known they were floating around. 

 

I don't attend every year, but was fortunate enough to have been there for this one so have a copy on my bookshelf. 

Edited August 29, 2023 by TwoCitiesCapital

[Munger_Disciple]

13 hours ago, Parsad said:

 

Thanks to Kyle Holmes for confirming from the 1992 FFH Letter that Prem owns 100% of Sixty-Two since buying out the minority shareholders in 1992.  For some reason, I thought he increased his stake to 70%+, but he bought control of the whole entity.  Cheers!

 

[Parsad]

Actually, here is the information Kyle put together from the 1992 Letter...it actually seems that the minority interest was bought by Fairfax in 1992 from the minority investors...not sure if the ownership is the same today...but Prem certainly has control of Sixty-Two.  Maybe others know.  Cheers!

 

Sanjeev,

 

I was reading the message board this morning so I figured I would pass the below/attached from an old annual letter over to you related to one of the threads for what it was worth:

 

In 1992 we simplified our corporate relationships significantly by the purchase of Hamblin Watsa Investment Counsel Ltd. (HWIC) as well as a 49.9% interest in The Sixty Two Investment Company Limited (Sixty Two), the controlling shareholder of Fairfax. As I was a shareholder in both these companies and recognized the potential conflict of interest was very high, I want to make sure you understand how and why we did these transactions and why they were fair (I hope you agree!).

 

---

 

The purchase of the 49.9% interest in Sixty Two was basically to provide liquidity to the original investors who backed me seven years ago, on terms attractive to Fairfax. Sixty Two’s only asset is shares of Fairfax and it has no liabilities. The shares of Sixty Two were valued on the basis of the market price of the Fairfax shares owned by it, less a liquidity discount of 15%. As disclosed in Note 9, in essence Fairfax issued approximately 680,000 shares to acquire indirect ownership of about 800,000 of its shares. The net result was that Fairfax effectively repurchased approximately 120,000 of its shares (with a market value of over $3.3 million at $28 per share) for no cost. Book value and earnings per share will be about 2% higher because of this purchase. Sixty Two will continue to be controlled by me as it has been in the past. This purchase also was approved by our Board of Directors, the majority of our minority shareholders and all the investors in Sixty Two. With the completion of these two transactions, Fairfax is much simplified in its relationships and perhaps more focused. Also, the purchase of the Sixty Two shares brings to an end (at least formally) the original partnership that refinanced Fairfax (then known as Markel Financial) in those early days in 1985. Looking back, these investors must have been special to have financed an almost bankrupt insurance holding company led by a chairman with no corporate experience at all. There may, after all, be some truth in the definition of an entrepreneur–‘‘Unreasonable conviction based on inadequate evidence’’! Even though this group will continue to be shareholders for some time, I want to take this opportunity to thank them for their invaluable support, without which Fairfax would not have existed.

 

To further add some more colour to the below, as I understand it, Fairfax still owns 49.995% of Sixty Two while Prem still owns the other 50.005% so on an economic basis Prem effectively owns 799,389 shares via his interest in Sixty Two (he also owns another 744,085 shares to take his total to 1,543,474 shares) but of course due to his control of Sixty Two and then in turn Fairfax he controls 100% of the votes related to these shares… additionally, he does not need to worry about any issues related to minority partners in Sixty Two as Fairfax is his minority partner which he obviously controls so it provides for a lot of certainty related to Prem’s protection of the culture/etc at Fairfax longer term as you well know!

 

Note 9 from the 1992 Annual Report

 

On November 5, 1992 the company issued 433,773 subordinate voting shares at $28 per share as partial consideration for the purchase of Hamblin Watsa Investment Counsel Ltd.

 

Also on November 5, 1992, the company issued 679,352 subordinate voting shares at $28 per share to indirectly purchase 49.995% of The Sixty Two Investment Company Limited which owns 1,548,000 multiple voting and 50,620 subordinate voting shares of Fairfax.  The company's indirect ownership of its own shares constitutes an effective reduction of shares outstanding by 799,230 and this effective reduction has been reflected in the fully diluted earnings per share calculation and the book value per share calculation.

 

 

 

From Fairfax’s 2023 MIC

 

Mr. Prem Watsa controls Sixty Two, which owns 50,620 of our subordinate voting shares and 1,548,000 of our multiple voting shares, and himself beneficially owns an additional 741,985, and exercises control or direction over an additional 2,100, of our subordinate voting shares.

[Munger_Disciple]

So I understand  (from an economic interest) Prem owns 50% of 62 plus another 744K shares directly. But it also means that there are really only 1,548,000/2 = 774,000 multiple voting shares outstanding in the company but Prem gets to vote as if there are 1,548,000 multiple voting shares because of his control of 62. 

Edited August 30, 2023 by Munger_Disciple

[gfp]

10 minutes ago, Munger_Disciple said:

So I understand  (from an economic interest) Prem owns 50% of 62 plus another 744K shares directly. But it also means that there are really only 1,548,000/2 = 774,000 multiple voting shares outstanding in the company but Prem gets to vote as if there are 1,548,000 multiple voting shares because of his control of 62. 

It's probably where Sardar got the idea

[Parsad]

19 hours ago, John Hjorth said:

 

Kicking in a tiny footnote here. This must be the first time I have been made aware of the existence of this book! - at least I think so!

 

Anyone here on CoBF being lucky enough to own a specimen?

 

Found this in the 2010 Letter [issued in 2011] mentioning the book :

 

 

Also, then found this!

 

- - - o 0 o - - -

 

Now this "must have" urge starts kicking in at me! 

 

Yup, I have one sent to me and autographed by Prem!  Thanks PW!

 

I keep it with the original Markel and Fairfax annual reports I have...given to me by an analyst friend at Fairfax...his own personal collection over the years.  Thanks PI! 

 

Two of the nicest gifts I've ever gotten!  Cheers! 

[Munger_Disciple]

8 minutes ago, gfp said:

It's probably where Sardar got the idea

 

 Hopefully the Sardar analogy doesn't go too far at Fairfax. 

[Xerxes]

@Parsad

for the uninitiated, who is Kyle ? 

[Hoodlum]

UBS says Hurricane Idalia could cost insurers $9.36 bln.  I don’t know what Fairfax’s exposure to the Florida market would be. 
 

https://www.reuters.com/world/us/hurricane-idalia-could-cost-insurers-936-bln-ubs-2023-08-30/

[Parsad]

4 hours ago, Xerxes said:

@Parsad

for the uninitiated, who is Kyle ? 

 

Kyle is a fund manager and member of the COBF.  Cheers!

[Parsad]

1 hour ago, Hoodlum said:

UBS says Hurricane Idalia could cost insurers $9.36 bln.  I don’t know what Fairfax’s exposure to the Florida market would be. 
 

https://www.reuters.com/world/us/hurricane-idalia-could-cost-insurers-936-bln-ubs-2023-08-30/

 

Generally as a rule of thumb...Fairfax takes a 1-3% hit of any large catastrophe and Berkshire takes a 5-8% hit.  Idalia is easily manageable by both.  Cheers!