Fairfax 2023

[Xerxes]

9 hours ago, Haryana said:

 

Berkshire vs Fairfax, Millennium Till Month

 

Thanks. For FFH in the chart the dividend seems to be included I am guessing. How does the mechanics of the chart works ?

 

does it assume that the $10 cash dividend is re-invested back into FFH when it was cashed out. Pretty much assuming a synthetic total capital return made entirely of repurchases (ignoring tax)

 

or is the dividend is not assumed to be re-invested ?

[MMM20]

10 hours ago, Haryana said:

 

Berkshire vs Fairfax, Millennium Till Month

 

 

Here's the corresponding updated valuation on P/B (for what it's worth) with MKL thrown in. BRK (~1.5x) and FFH (~1x) are both valued at roughly the same multiples now as they were to start the millennium. I think to some extent it speaks to the fact that most investors prefer a smooth ~10% to a lumpy ~15% (long term looking forward IMHO) because it's just easier to sleep at night and hold on through thick and thin.

 

 

 

Edited October 3, 2023 by MMM20

[no_free_lunch]

I think there was a style drift in ffh few years back.  That's what concerned me.  Am I buying the same company of the past?  I only got back in because viking made a compelling argument and the share price collapsed.  

[MMM20]

17 minutes ago, no_free_lunch said:

I think there was a style drift in ffh few years back.  That's what concerned me.  Am I buying the same company of the past?  I only got back in because viking made a compelling argument and the share price collapsed.  

Style drift in what sense? (I thought they were just doing the same old thing and it was falling more and more out of popular favor in a ZIRP world - but I have been a shareholder for less than three years)

 

Edited October 3, 2023 by MMM20

[SafetyinNumbers]

2 hours ago, MMM20 said:

 

Here's the corresponding updated valuation on P/B (for what it's worth) with MKL thrown in. BRK (~1.5x) and FFH (~1x) are both valued at roughly the same multiples now as they were to start the millennium. I think to some extent it speaks to the fact that most investors prefer a smooth ~10% to a lumpy ~15% (long term looking forward IMHO) because it's just easier to sleep at night and hold on through thick and thin.

 

 

 

I think the large transition from value investing to passive and quants has amplified the desire for a smooth 10% to a lumpy 15%. Social value is also a much more relevant factor and BRK/MKL enjoy very loyal shareholder basis. They never think about selling. Meanwhile, almost every Fairfax bull I talk to is waiting anxiously for Prem to make a mistake so they can sell before experiencing a drawdown.

[no_free_lunch]

45 minutes ago, MMM20 said:

Style drift in what sense? (I thought they were just doing the same old thing and it was falling more and more out of popular favor in a ZIRP world - but I have been a shareholder for less than three years)

 

 

They were making giant short bets on equity indexes (I may be slightly wrong on the terminology but that was the essence of it) for years.  As the market cranked forward over the past decade this was one component of why they lagged so badly.  I believe they have now stopped with the shorting.  This general market shorting only started in (I'm guessing here) 2010, it was not part of their original strategy.

 

I like them for everything else, making counter-cyclical bets and buying out of favor companies.  I like that they have an insurance company they can draw additional capital from.  I just don't want them making macro bets.  If they want to hedge I would prefer they just hold more bonds.

Edited October 3, 2023 by no_free_lunch

[TwoCitiesCapital]

1 hour ago, no_free_lunch said:

 

They were making giant short bets on equity indexes (I may be slightly wrong on the terminology but that was the essence of it) for years.  As the market cranked forward over the past decade this was one component of why they lagged so badly.  I believe they have now stopped with the shorting.  This general market shorting only started in (I'm guessing here) 2010, it was not part of their original strategy.

 

I like them for everything else, making counter-cyclical bets and buying out of favor companies.  I like that they have an insurance company they can draw additional capital from.  I just don't want them making macro bets.  If they want to hedge I would prefer they just hold more bonds.

To be fair, it wasn't really style drift. They shorted Japanese equities back in the 90s, pretty sure they did so again during the tech bubble, and were short credit/long CDS in 2008. 

 

Macro bets have LONG been part of their management style. If anything, the recent style drift has been the promise to not short again, but the near zero duration call was still a HUGE macro bet that shareholders paid for during 2016 - 2021 where shareholders received basically no income return from the fixed income portfolio. 

[treasurehunt]

15 hours ago, Haryana said:

 

Berkshire vs Fairfax, Millennium Till Month

 

 

Morningstar's data for Fairfax does not look correct here, probably because there was no FRFHF ticker back in 1999. Here's the same chart for FFH.TO - in USD and with dividends reinvested - for the same period. The total return is quite a bit lower.

 

 

[Santayana]

It's easy to point at the shorts and deflation swaps, and say wow Fairfax really was screwing up back then.  But if you could go back in time and have them not do those things, but also not make all the acquisitions they made during those years, would you prefer that vs. where they are now?

[SafetyinNumbers]

4 hours ago, TwoCitiesCapital said:

To be fair, it wasn't really style drift. They shorted Japanese equities back in the 90s, pretty sure they did so again during the tech bubble, and were short credit/long CDS in 2008. 

 

Macro bets have LONG been part of their management style. If anything, the recent style drift has been the promise to not short again, but the near zero duration call was still a HUGE macro bet that shareholders paid for during 2016 - 2021 where shareholders received basically no income return from the fixed income portfolio. 

The style drift is getting a macro call wrong that shareholders were big fans of at the time they were placed.

[jfan]

On 7/29/2023 at 2:53 AM, Maverick47 said:

In California I think it’s fair to say that neither the state government itself nor the taxpayers are currently on the hook for insurance losses, nor are they providing any capital to support the writing of risks in the property insurance marketplace.

 

There are some CA state run/organized providers of basic property insurance (the FAIR plan for example was set up to provide basic property insurance to customers who can’t find coverage in the voluntary market).  But all property insurers in the state are required to belong to and support the program.  If there are any losses not covered by the FAIR plans surplus, then, just as with mandatory Guaranty Fund membership, the member companies who are not bankrupt themselves are levied assessments to pay for any shortfall in claims paying ability for FAIR plan customers’ losses…and they can then pass on those assessments to their own customers (I may have the details of this wrong — it’s possible that they may just be ordered to add an assessment to their own customers and forward the collected funds to the FAIR plan without having to first pay an assessment up front).

 

 As long as there are private insurers to levy assessments against who can in turn charge their own customers in the future to repay those assessments, then it is private insurance customers who in essence are paying the “tax” to provide a backstop for coverage provided to customers who live in risky areas and can only find insurance coverage in the FAIR plan.

The California Earthquake Authority is a somewhat different animal.  It was funded with surplus contributions from member companies who were allowed thereby to offer earthquake coverage to their own home insurance customers from the Earthquake Authority and not expose their own company’s surplus to a large quake.  The Authority does not pay income tax on any underwriting profits, so its surplus can grow much as an individual’s 401k retirement account.  The major flaw is that its investment strategy is pretty much forced to only invest in government bonds and so cannot grow anywhere near as rapidly as would be the case if it were allowed a wider range of investments.  Nevertheless it does have many billions of dollars of retained earnings/surplus and also purchases cat reinsurance (Berkshire provided one of its initial multi year cat reinsurance covers when it started in 1996).

 

However,if there ever is an EQ shake event or perhaps several in close succession to each other that might exhaust the claims paying ability, beyond a modest assessment against member companies, it’s technically possible that claimants would not be made whole….and would have to receive prorata settlements of their claims.  The CEA is not a member of the Guaranty Fund, so if it becomes insolvent, there is no Guaranty Fund backstop for individual claims, so in this case, neither the state’s taxpayers nor private insurer customers provide a backstop.

When the private property insurance market shows strains, the effect is most likely to drive a reduction in the rate of economic growth in the state.  Real estate transactions become more difficult if buyers are not able to find affordable policies (which is a requirement for any mortgage provider).  Homeowners may find it more difficult to sell when they want to move, and to the extent that insurance becomes more difficult to obtain and the price increases, I would presume that it would impact home prices.  In the long run, if the private marketplace doesn’t improve, then it could very well be the case that the state ends up becoming a provider of last resort.  In my opinion that would likely be a mistake for California as I don’t have great confidence in the ability of a single state to manage insurance risks…nor does it make sense to end up with the only providers being the state itself or companies that only write property in that state.  
 

Florida is a poster child in this regard. Citizens Insurance, the state run insurer of last resort is often the largest provider of property insurance in the state. Very few national companies have a material market share in the state, so the ability to spread risks nationally across many risk geographies is lost.  Insurance is a form of lubrication to keep the gears of an economy moving after catastrophes.  When the insurance system in a given state loses the ability to spread risk broadly, the probability increases that a large, somewhat uninsured catastrophe in a state would effectively throw sand into the gears of the economy and cause it to slow down if not stop temporarily.  That is one way in which a state itself (or rather its economy) would be paying after the fact for a regulatory failure to support the private insurance marketplace.

 

 

 

 

 

 

 

Florida insurance regulation creates big changes | Grant Thornton

 

April 2023 discussion on some changes to the Florida insurance/reinsurance market. 

Curious to see what others think about these changes.

 

[valuesource]

On 10/2/2023 at 10:59 AM, dealraker said:

Being silly MMM20.  Nothing more.   

I miss BSillyO

[Crip1]

8 hours ago, valuesource said:

I miss BSillyO

You're not the only one. 

[Viking]

FYI, I did an edit to this note on October 11 to incorporate feedback received from other board members over the past 5 days (since my original post was made).

---------

Below is an update my 3-year earnings estimate for Fairfax. Please note, forecasts are a guess at a point in time. To state the obvious, things are constantly changing. As a result, annual forecasts can become outdated quickly.

 

Summary

 

My estimate is Fairfax will earn about $151/share in 2023.

• Shares closed on Oct 11, 2023 at $840, so the current PE = 5.6
• BV = $834, so the current P/BV = 1.01 

 

 

What could we see for EPS in Q3?

 

For Q3, 2023, my guess is EPS will come in at around $20/share.

• Underwriting profit: likely a tailwind, given the mild hurricane season.
• Interest and dividend income: likely a tailwind.
• Unrealized gains from equities: likely a tailwind. My tracker has the gains at $266 million. But equity market averages were down about 4% in Q3 so the holdings I don't track might be a headwind.
• Unrealized losses from fixed income: likely a headwind, given the big move in bond yields further out on the curve. In Q2, the mark to market loss from bonds was $405 million; perhaps we see a loss of $250 million or so in Q3?
• Currency will be a headwind given the strength of the US$ in Q3.

I am forecasting earnings of $151/share for 2023. Reported earnings in 1H were $84/share, so that leaves about $67/share to come in the 2H. An estimate of around $20/share for Q3 and another $45/share for Q4 seems reasonable (this assumes the gain from the GIG transaction falls in Q4).

 

2023-2025 Forecast

 

Most line items in my forecasts have been changed a little to reflect ‘new news.’ A couple of weeks ago i updated the ‘interest and dividend’ bucket and this bumped the estimates higher for 2024 and 2025. I also reduced ‘net gains (losses) on investments’ a little in 2023 to reflect the spike in bond yields we are currently seeing.

 

The hardest piece to forecast with Fairfax is capital allocation. Fairfax looks poised to generate a significant amount of earnings from 2023-2025 (our forecast period). But we don’t know today exactly where the future cash flows will be invested. Looking at the last 5 years, the management team has been outstanding with capital allocation. My guess is they will continue to make good decisions (on balance) and this will benefit shareholders - providing a possible tailwind to my forecasts.

 

I am assuming interest rates remain roughly at current levels. Of course, this will not be the case.

 

Below is an 8-year snapshot for Fairfax. It communicates in a concise manner the dramatic transformation that has happened at this company, beginning in 2021. Look at the trend in operating earnings - it is a pretty amazing story. Fairfax today is like a phoenix, rising from the ashes of its past, renewed and stronger.

 

 

What are the key assumptions?

 

1.) underwriting profit: Estimated to increase to a record $1.27 billion in 2023.

• I am forecasting Fairfax’s combined ratio (CR) to remain flat at 94.5 in 2023, and then to increase modestly to 95 in 2024 and 95.5 in 2025. For each year, I am assuming a ‘normal/historical’ level of catastrophe losses.
• The Gulf Insurance Group (GIG) acquisition should add about $1.7 billion to net written premiums when it closes (Q4?).
• Everything I read suggests the hard market will continue in 2024, although at a slower pace.
• Bottom line, low double digit growth in net premiums written seems reasonable for 2024.

2.) interest and dividend income: Estimated to increase to a record $1.9 billion in 2023.

• Interest rate pickup: the average duration of the fixed income portfolio was 2.4 years at June 30, 2023. A significant amount of the fixed income portfolio matures each quarter allowing Fairfax the opportunity to reinvest the proceeds at much higher interest rates. A pickup of $20 million per quarter seems reasonable.
• New business: PacWest loans will deliver incremental interest income (of $80-$90 million?) beginning in Q3, 2023. I am modelling an increase of about $20 million per quarter.
• GIG should add about $2.4 billion to the total investment portfolio when it closes.
• Eurobank: the plan is to start paying a dividend in 2024. If this happens, we might see dividend income increase by up to $70 million.
• Potential headwind: Short-term treasury rates might come down more quickly than expected in 2024 (2 rate cuts are currently expected in 2H 2024). If this happens, interest income on cash/short term balances could decline in 2H 2024.

3.) Share of profit of associates: Estimated to increase to a record $1.075 billion in 2023.

• Earnings at Eurobank, Poseidon/Atlas, EXCO, Stelco and Fairfax India, in aggregate, should continue to grow nicely. I am watching interest costs at Poseidon; this could be a headwind.
• 2023 headwind: Resolute Forest Products was sold earlier in 2023. It contributed $159 million in 2022.
• 2024 headwind: I estimate GIG will contribute $100 million in 2023. To reflect the GIG transaction, I removed $100 million from my 2024 estimate.

4.) Effects of discounting and risk adjustment (IFRS 17).

• Interest rate changes are an important driver for bucket. Rising interest rates have caused this bucket to increase. Given I am forecasting interest rates moving forward to remain about where they are today, I am reducing this number for 2024 and 2025. My estimates here could be a little messed up.

5.) Life insurance and runoff.

• This combination of businesses lost $167 million in 2022. I am forecasting this bucket to lose $225 million in each of the next three years. This is hard to know.

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

• In the near term, we could get small write downs in both Boat Rocker and Farmers Edge. With Covid in the rear-view mirror, earnings at Recipe could move higher ($100 million per year?). Earnings at Dexterra are growing again. AGT is a sleeper holding. Grivalia Hospitality is in its peak investment phase; earnings could grow nicely looking out a year or two. This bucket is poised to grow nicely for Fairfax in the coming years. Yes, the results will be lumpy.

7.) Interest expense: A slight increase to the current run rate.

8.) Corporate overhead and other: A slight increase to the current run rate.

 

9.) Net gains on investments: Estimated to come in around $550 million in 2023. Unrealized losses in the fixed income portfolio was a headwind in Q2. This likely continues in Q3, 2023.

 

My estimates for 2024 and 2025 assume (this is very general):

• Mark-to-market equity holdings of about $7.8 billion increase in value by 10% per year, or $800 million.
• A small bump of $100 to $200 million per year for additional gains (equities and fixed income).

10.) Gain on sale/deconsol of insurance sub: This is a wild card. This is where I put the large asset sales. In 2022, it was the sale of pet insurance business. In 2023:

• Ambridge: closed May 10, 2023 and resulted in a pre-tax gain of $259.1.  
• GIG: expected to close in late 2023 at which time Fairfax will record a pre-tax gain of $290 million.

For 2024 and 2025, I estimate no gains from sales/write up of assets. There likely will be something:

• Perhaps we get a Digit or AGT IPO.
• Perhaps Fairfax sells another holding for a large gain.

This ‘bucket’ is likely where I will be most wrong with my forecast. Developments here will likely have a material positive impact to Fairfax’s reported results (earnings and book value).

 

11.) Income taxes: estimated at 19% (historical average rate)

12.) Non-controlling interests: estimated at 11% (historical average rate)

 

13.) Shares Outstanding: Estimated that effective shares outstanding is reduced by 400,000 per year. This is a little lower than the recent run rate for buybacks.

 

Notes:

• Underwriting profit: Includes insurance and reinsurance; does not include runoff or Eurolife life insurance.
• Interest and dividends: Includes insurance, reinsurance and runoff.

Return on Equity Calculation

 

Return on equity (ROE) is calculated below using ‘average equity’ which is:

• (PY ending BV/share + CY ending BV/share) / 2

I think most of the industry (other P/C insurance companies, analysts) calculate ROE using an average number for equity. So, this makes my estimates more comparable with industry numbers.   

 

From 2023-2025, my average estimated ROE for Fairfax is 16.2%. The average ROE from 2018-2022 was 10.1% so Fairfax is ‘kicking it up a notch.’ This is not surprising given the increase we are seeing in operating income (considered the high quality part of earnings).

Edited October 12, 2023 by Viking

[nwoodman]

3 hours ago, Viking said:

Below is an update my 3-year earnings estimate for Fairfax. Please note, forecasts are a guess at a point in time. To state the obvious, things are constantly changing. As a result, annual forecasts can become outdated quickly.

 

Summary

 

My estimate is Fairfax will earn about $155/share in 2023.

• Shares closed on Friday Oct 6, 2023 at $854, so the current PE = 5.5
• BV = $834, so the current P/BV = 1.02 

 

What could we see for EPS in Q3?

 

For Q3, 2023, my guess is EPS will come in at around $30/share.

• Underwriting profit: likely a tailwind, given the mild hurricane season.
• Interest and dividend income: likely a tailwind.
• Unrealized gains from equities: likely a tailwind. My tracker has the gains at $266 million.
• Unrealized losses from fixed income: likely a headwind, given the big move in bond yields further out on the curve. In Q2, the mark to market loss from bonds was $405 million; perhaps we see a loss of $150 million or so in Q3?

I am forecasting earnings of $155/share for 2023. Reported earnings in 1H were $84/share, so that leaves about $70/share to come in the 2H. An estimate of around $30/share for Q3 and another $40/share for Q4 seems reasonable (this assumes the gain from the GIG transaction falls in Q4).

 

2023-2025 Forecast

 

Most line items in my forecasts have been changed a little to reflect ‘new news.’ A couple of weeks ago i updated the ‘interest and dividend’ bucket and this bumped the estimates higher for 2024 and 2025. I also reduced ‘net gains (losses) on investments’ a little in 2023 to reflect the spike in bond yields we are currently seeing.

 

The hardest piece to forecast with Fairfax is capital allocation. Fairfax looks poised to generate a significant amount of earnings from 2023-2025 (our forecast period). But we don’t know today exactly where the future cash flows will be invested. Looking at the last 5 years, the management team has been outstanding with capital allocation. My guess is they will continue to make good decisions (on balance) and this will benefit shareholders - providing a possible tailwind to my forecasts.

 

I am assuming interest rates remain roughly at current levels. Of course, this will not be the case.

 

Below is an 8-year snapshot for Fairfax. It communicates in a concise manner the dramatic transformation that has happened at this company, beginning in 2021. Look at the trend in operating earnings - it is a pretty amazing story. Fairfax today is like a Phoenix, rising from the ashes of its past, renewed and stronger.

 

 

What are the key assumptions?

 

1.) underwriting profit: Estimated to increase to a record $1.27 billion in 2023.

• I am forecasting Fairfax’s combined ratio (CR) to remain flat at 94.5 in 2023, and then to increase modestly to 95 in 2024 and 95.5 in 2025. For each year, I am assuming a ‘normal/historical’ level of catastrophe losses.
• The Gulf Insurance Group (GIG) acquisition should add about $1.7 billion to net written premiums when it closes (Q4?).
• Everything I read suggests the hard market will continue in 2024, although at a slower pace.
• Bottom line, low double digit growth in net premiums written seems reasonable for 2024.

2.) interest and dividend income: Estimated to increase to a record $1.9 billion in 2023.

• Interest rate pickup: the average duration of the fixed income portfolio was 2.4 years at June 30, 2023. A significant amount of the fixed income portfolio matures each quarter allowing Fairfax the opportunity to reinvest the proceeds at much higher interest rates. A pickup of $20 million per quarter seems reasonable.
• New business: PacWest loans will deliver incremental interest income (of $80-$90 million?) beginning in Q3, 2023. I am modelling an increase of about $20 million per quarter.
• GIG should add about $2.4 billion to the total investment portfolio when it closes.
• Eurobank: the plan is to start paying a dividend in 2024. If this happens, we might see dividend income increase by up to $70 million.
• Potential headwind: Short-term treasury rates might come down more quickly than expected in 2024 (2 rate cuts are currently expected in 2H 2024). If this happens, interest income on cash/short term balances could decline in 2H 2024.

3.) Share of profit of associates: Estimated to increase to a record $1.075 billion in 2023.

• Earnings at Eurobank, Poseidon/Atlas, EXCO, Stelco and Fairfax India, in aggregate, should continue to grow nicely. I am watching interest costs at Poseidon; this could be a headwind.
• 2023 headwind: Resolute Forest Products was sold earlier in 2023. It contributed $159 million in 2022.
• 2024 headwind: I estimate GIG will contribute $100 million in 2023. To reflect the GIG transaction, I removed $100 million from my 2024 estimate.

4.) Effects of discounting and risk adjustment (IFRS 17).

• Interest rate changes drive this bucket. My estimates here could be a little messed up. Given I am forecasting interest rates to remain about where they are today, I am leaving this number the same over the forecast period (at my estimate for June 30, 2023).

5.) Life insurance and runoff.

• This combination of businesses lost $167 million in 2022. I am forecasting this bucket to lose $225 million in each of the next three years. This is hard to know.

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

• In the near term, we could get small write downs in both Boat Rocker and Farmers Edge. With Covid in the rear-view mirror, earnings at Recipe could move higher ($100 million per year?). Earnings at Dexterra are growing again. AGT is a sleeper holding. Grivalia Hospitality is in its peak investment phase; earnings could grow nicely looking out a year or two. This bucket is poised to grow nicely for Fairfax in the coming years. Yes, the results will be lumpy.

7.) Interest expense: A slight increase to the current run rate.

8.) Corporate overhead and other: A slight increase to the current run rate.

 

9.) Net gains on investments: Estimated to come in around $750 million in 2023. Unrealized losses in the fixed income portfolio was a headwind in Q2. This likely continues in Q3, 2023.

 

My estimates for 2024 and 2025 assume (this is very general):

• Mark-to-market equity holdings of about $7.8 billion increase in value by 10% per year, or $800 million.
• A small bump of $100 to $200 million per year for additional gains (equities and fixed income).

10.) Gain on sale/deconsol of insurance sub: This is a wild card. This is where I put the large asset sales. In 2022, it was the sale of pet insurance business. In 2023:

• Ambridge: closed May 10, 2023 and resulted in a pre-tax gain of $259.1.  
• GIG: expected to close in late 2023 at which time Fairfax will record a pre-tax gain of $290 million.

For 2024 and 2025, I estimate no gains from sales/write up of assets. There likely will be something:

• Perhaps we get a Digit or AGT IPO.
• Perhaps Fairfax sells another holding for a large gain.

This ‘bucket’ is likely where I will be most wrong with my forecast. Developments here will likely have a material positive impact to Fairfax’s reported results (earnings and book value).

 

11.) Income taxes: estimated at 19% (historical average rate)

12.) Non-controlling interests: estimated at 11% (historical average rate)

 

13.) Shares Outstanding: Estimated that effective shares outstanding is reduced by 400,000 per year. This is a little lower than the recent run rate for buybacks.

 

Notes:

• Underwriting profit: Includes insurance and reinsurance; does not include runoff or Eurolife life insurance.
• Interest and dividends: Includes insurance, reinsurance and runoff.

Return on Equity Calculation

 

Return on equity (ROE) is calculated below using ‘average equity’ which is:

• (PY ending BV/share + CY ending BV/share) / 2

I think most of the industry (other P/C insurance companies, analysts) calculate ROE using an average number for equity. So, this makes my estimates more comparable with industry numbers.   

 

From 2023-2025, my average estimated ROE for Fairfax is 16.8%. The average ROE from 2018-2022 was 10.1% so Fairfax is ‘kicking it up a notch.’ This is not surprising given the increase we are seeing in operating income (considered the high quality part of earnings).

@Viking Great work as always.  Agree capital allocation/deal flow is key moving forwards.  Higher for longer definitely helps though, if nothing else it keeps the proverbial foot on the competition’s throat.  Analysts forecasts are still very much in the “they screw it up” and interest rates fall fast.  FWIW (not much) this is the view of the few: FY23 $US135, FY24 $US118 and FY25 $US79 they then fall of the proverbial cliff (our Morningstar friend no doubt).  A very different view indeed.

 

In terms of capital allocation, I see a minimum 10% just via Omer’s buybacks, then around 12-15% buying back their own shares.  So they should have no problems reallocating incremental capital at sensible rates at least for the next few years.  Even then,   I don’t believe that the 11-12% compounding machine, that has been in operation for 30+ years, is broken. You have to keep telling yourself that if these “analysts” were any good they would be running their own book.

 

Edited October 8, 2023 by nwoodman

[Viking]

14 hours ago, nwoodman said:

@Viking Great work as always.  Agree capital allocation/deal flow is key moving forwards.  Higher for longer definitely helps though, if nothing else it keeps the proverbial foot on the competition’s throat.  Analysts forecasts are still very much in the “they screw it up” and interest rates fall fast.  FWIW (not much) this is the view of the few: FY23 $US135, FY24 $US118 and FY25 $US79 they then fall of the proverbial cliff (our Morningstar friend no doubt).  A very different view indeed.

 

In terms of capital allocation, I see a minimum 10% just via Omer’s buybacks, then around 12-15% buying back their own shares.  So they should have no problems reallocating incremental capital at sensible rates at least for the next few years.  Even then,   I don’t believe that the 11-12% compounding machine, that has been in operation for 30+ years, is broken. You have to keep telling yourself that if these “analysts” were any good they would be running their own book.

 

@nwoodman my guess is analysts struggle with the volatility in Fairfax’s earnings. The industry views volatility as ‘risk’ and as a big negative (hence, big hair cut to earnings). Which just seems a little bizarre to me. 
 

i think analysts also struggle with the current size of the spike in earnings. They don’t trust its staying power - lots of posters on the board also don’t trust the sustainability of earnings. 
 

So estimates for 2024 are lower than 2023. And estimates for 2025 are lower than 2024 (much lower than 2023). Makes no sense to me. 

Edited October 8, 2023 by Viking

[Maverick47]

To be fair, the estimates through 2024 are an average of 6 analysts, while for the years thereafter, only one analyst provided EPS estimates.

[SafetyinNumbers]

I think part of is it they miss the IFRS 17 impact on earnings because they model underwriting income on the stated combined ratio while the IFRS adjusted combined ratio has been lower. Viking has something in line 4 of his model above. When I look at RBC’s model, they have the combined ratio down but also have underwriting income down year over year. When I was in equity research we would say that’s not internally consistent.

 

For 2024, the growth in investment income is underestimated based on current rates, associates income is held flat from 2022 despite H123 at ~60% of 2022 already and gains expected on the equity portfolio are very small. He’s at $130/sh for 2024 and he might be right but the odds seem low.
 

 

[nwoodman]

15 minutes ago, SafetyinNumbers said:

I think part of is it they miss the IFRS 17 impact on earnings because they model underwriting income on the stated combined ratio while the IFRS adjusted combined ratio has been lower. Viking has something in line 4 of his model above. When I look at RBC’s model, they have the combined ratio down but also have underwriting income down year over year. When I was in equity research we would say that’s not internally consistent.

 

For 2024, the growth in investment income is underestimated based on current rates, associates income is held flat from 2022 despite H123 at ~60% of 2022 already and gains expected on the equity portfolio are very small. He’s at $130/sh for 2024 and he might be right but the odds seem low.
 

 

Any chance you could post the RBC model?

[SafetyinNumbers]

3 minutes ago, nwoodman said:

Any chance you could post the RBC model?

 

[nwoodman]

59 minutes ago, SafetyinNumbers said:

 

 

Thanks @SafetyinNumbers.  What is RBC's price target?  Taking these numbers or @Viking great work, this still seems very cheap.  The current price surely is predicated on capital destruction at some point, either through misallocation of capital, seizure of foreign assets or massive policy misplacing.

 

Running a 20 year test on P/B.  The mean for Markel, Berkshire, Fairfax is:

 

MKL 1.5x

BRK 1.4x

FFH. 1.0x

 

Nothing new in the observation that long ROE is what will drive share price.  Over the last 20 years Mean ROE has been

 

MKL 7.9%

BRK 9.3%

FFH 8.1%

 

I totally agree with the observation that for a decade of this period, the float was not adding meaningfully to ROE, that's changed.  A couple of years of +1 STD deviation (18%) in FFH's ROE seems very likely.  Whether this results in +1 standard deviation of 1.3x's book I am not sure, but it seems like an asymmetric bet.

 

 

Edited October 9, 2023 by nwoodman

[SafetyinNumbers]

7 minutes ago, nwoodman said:

Thanks @SafetyinNumbers.  What is RBC's price target?  Taking these numbers or @Viking great work, this still seems very cheap.  The current price surely is predicated on capital destruction at some point, either through misallocation of capital, seizure of foreign assets or massive policy misplacing.

 

Running a 20 year test on P/B.  The mean for Markel, Berkshire, Fairfax is:

 

MKL 1.5x

BRK 1.4x

FFH. 1.0x

 

Nothing new in the observation that long ROE is what will drive share price.  Over the last 20 years Mean ROE has been

 

MKL 7.9%

BRK 9.3%

FFH 8.1%

 

I totally agree with the observation that for a decade of this period, the float was not adding meaningfully to ROE, that's changed.  A couple of years of +1 STD deviation in FFH's ROE seems very likely.

 

 

They are at US$980. 
 

The increase in interest rates means a structural increase in ROE vs the last 20 years. Should be interesting what the narratives will be when the multiple expands and how quickly holders will jump ship. There will surely be lots of drawdowns that investors will want to avoid. 

[StubbleJumper]

28 minutes ago, nwoodman said:

 A couple of years of +1 STD deviation (18%) in FFH's ROE seems very likely.  Whether this results in +1 standard deviation of 1.3x's book I am not sure, but it seems like an asymmetric bet.

 

It's absolutely an asymmetric bet. 

 

Anyone can take @Viking's forecasts for the current year and the next two and develop optimistic, pessimistic and mid-point scenarios for BV on Dec 31, 2025.  Even if you give a haircut those forecasts out of an abundance of caution to create a pessimistic scenario, it's hard to envision a scenario where BV isn't US$1,100 by year-end 2025.  With last week's market price of ~US$850, a buyer last week would have a perfectly nice return over the next couple of years without any P/BV expansion at all, and that's based on a somewhat pessimistic scenario that applies a modest haircut to @Viking's forecasts.

 

If get a bit braver and ignore the desire for an abundance of caution and accept @Viking's forecasts as they've been presented, it's even better.  And then if you get really, really ballsy and dream about an outrageous P/BV of 1.1 on Dec 31, 2025 you get an outstanding return.  You don't need 1.3x or 1.4x BV to get a great result over the next couple of years from an investment today.

 

So yeah.  Asymmetric is exactly the right description.  If things go slightly poorly, you get a perfectly acceptable return, and if the moons and stars are even slightly aligned it could be considerably better 

 

SJ

[giulio]

FFH floating rate preferred shares are trading at >10% yield, possible redemption in dec 24/dec 25.

Canadian 3 month t-bill rate + spread (2.5-3%), resetting quarterly.

Bradstreet bought these in dec 2022.

The probability that they get called is low IMO, still looks like a good deal.

What am I missing? 

[MMM20]

2 hours ago, giulio said:

FFH floating rate preferred shares are trading at >10% yield, possible redemption in dec 24/dec 25.

Canadian 3 month t-bill rate + spread (2.5-3%), resetting quarterly.

Bradstreet bought these in dec 2022.

The probability that they get called is low IMO, still looks like a good deal.

What am I missing? 

 

Are those prefs a better risk/reward than the common at a ~18-20% earnings yield? I agree they look good (especially vs. FFH's fixed rate prefs @ ~6%) but I think Fairfax has a long runway for ROIC > WACC (most of which, again I'm a broken record, is float-based leverage at ~0% cost) so I still want 100% common.

 

Edited October 9, 2023 by MMM20