Fairfax 2023

[UK]

31 minutes ago, Mick92 said:

 

It's impossible to say definatively but I suspect a good chunk of it is based on Prem's reputation in the investment community.

 

From Buffett of the north, hugely successful macro bets not that far in the rear view mirror to a maybe past it guy running an insurer in Canada, to idiot Prem torching shareholders money on Blackberry and other shitcos. All culminating in the guy screaming at him on one of the conference calls that he needed to go. But, by then the ship was turning. That was probably maximum Prem pessimism, I think he is on the rehabilitation path, but probably needs another year or two of excellent returns for the market to fully price that in and maybe the Buffett of the north nonsense starts being said again.

 

Plus, who is buying FFH when sentiment was so low and dropping? People were bailing because of Prem maybe, but for other people looking at it, it was now an insurer, only listed in Canada, with the market mired in an apparently perpetual state of ZIRP. I dunno, it's not that surprising to me that the BV multiple just kept dropping.

 

Right now though, I just don't see a reason to sell, it's become by far my biggest portfolio position so you have to watch it closely but everything is humming along and I think there's at least another couple of years outperformance here to be had. 

 

Thanks. Sure. But how did this reputation was any better in 2016 vs 2023? This makes no sense to me? So OK, maybe it is still far from perfect in the eyes of the market, maybe only halfway to being perfect, everybody is entitled to have an opinion, but it seems to me, anyway you look, reputation should be way better now, than in 2016? But valuation is not.

 

Edited November 24, 2023 by UK

[SafetyinNumbers]

43 minutes ago, UK said:

 

Thanks. Sure. But how did this reputation was any better in 2016 vs 2023? This makes no sense to me? So OK, maybe it is still far from perfect in the eyes of the market, maybe only halfway to being perfect, everybody is entitled to have an opinion, but it seems to me, anyway you look, reputation should be way better now, than in 2016? But valuation is not.

 

The short answer is that shareholders really liked the hedges when they were on.
 

I didn’t own Fairfax back then but I was buying US banks in early 2016. A lot of financials were in free fall because the fears of the US and Canada going into negative rates seemed like they were at their highest point. A lot of the same PMs that now complain about the hedges owned Fairfax because of the hedges. The stock acted well when the market was down and especially when other financials were down so FFH had the effect of dampening volatility and increasing risk adjusted returns. Even now, anecdotally FFH tends underperform on big up days for the market and outperform on big down days and I think it’s partially because the historical hedges (including GFC-related hedges which worked out) still influence investor behaviour. 
 

The market wasn’t efficient back then and it isn’t now. Valuation and expected returns are just not that important to most active managers who are trying to beat the market in the short term. If they were trying to generate high risk adjusted absolute returns over long periods of time maybe it would be a different story.

[MMM20]

11 hours ago, Hamburg Investor said:

in the years 2000 and 2001, Markel had by far its worst CRs since 1990 to date (114% and 124%). I suspect a Black Swan event at Markel and Fairfax, but haven't checked. Does anyone know?

 

Edited November 24, 2023 by MMM20

[UK]

28 minutes ago, SafetyinNumbers said:

The short answer is that shareholders really liked the hedges when they were on.
 

I didn’t own Fairfax back then but I was buying US banks in early 2016. A lot of financials were in free fall because the fears of the US and Canada going into negative rates seemed like they were at their highest point. A lot of the same PMs that now complain about the hedges owned Fairfax because of the hedges. The stock acted well when the market was down and especially when other financials were down so FFH had the effect of dampening volatility and increasing risk adjusted returns. Even now, anecdotally FFH tends underperform on big up days for the market and outperform on big down days and I think it’s partially because the historical hedges (including GFC-related hedges which worked out) still influence investor behaviour. 
 

The market wasn’t efficient back then and it isn’t now. Valuation and expected returns are just not that important to most active managers who are trying to beat the market in the short term. If they were trying to generate high risk adjusted absolute returns over long periods of time maybe it would be a different story.

 

Thanks. Again, then it is quite ironic and bizzare situation. Looking forward it to be fixed:)

[dartmonkey]

So for $26b in equity, you get the returns from about $42b in bonds and associated companies, and $7b in more speculative equity investments (Occidental, Micron, Blackberry, Grivalia, Mytilineos, Kennedy Wilson, etc.). And you get some underwriting returns*, as a bonus. 

...
Is it fair to say that unlike Buffett, you both don’t think float generating businesses are worth more than book value?

 

For my part, no, not at all, on the contrary. The float is the source of the leverage.

[SafetyinNumbers]

3 minutes ago, dartmonkey said:

So for $26b in equity, you get the returns from about $42b in bonds and associated companies, and $7b in more speculative equity investments (Occidental, Micron, Blackberry, Grivalia, Mytilineos, Kennedy Wilson, etc.). And you get some underwriting returns*, as a bonus. 

...
Is it fair to say that unlike Buffett, you both don’t think float generating businesses are worth more than book value?

 

For my part, no, not at all, on the contrary. The float is the source of the leverage.

So you would pay a premium for any leverage or is this leverage more valuable because of its characteristics?

[SafetyinNumbers]

16 minutes ago, UK said:

 

Thanks. Again, then it is quite ironic and bizzare situation. Looking forward it to be fixed:)

It makes sense in context with investor behaviour and typical institutional manager constraints. The narrative will change when price changes. 

[dartmonkey]

Q. Is it fair to say that unlike Buffett, you both don’t think float generating businesses are worth more than book value?

 

A. For my part, no, not at all, on the contrary. The float is the source of the leverage.

Q. So you would pay a premium for any leverage or is this leverage more valuable because of its characteristics?

 

A. Yes, in principle. Leverage from taking out a big loan would be worth a lot less than safe uncallable leverage from a steady self-renewing source of float like Fairfax's insurance business. Given the fact that float represents $28b at Fairfax, and equity is $26b (including non-controlling interests), and Fairfax is trading at only 1.1x book, you might say that Mr Market is giving very little value to that float, but I think it deserves a much more healthy premium. A huge loan that you never have to pay back is worth something.

 

 

[SafetyinNumbers]

1 minute ago, dartmonkey said:

Q. Is it fair to say that unlike Buffett, you both don’t think float generating businesses are worth more than book value?

 

A. For my part, no, not at all, on the contrary. The float is the source of the leverage.

Q. So you would pay a premium for any leverage or is this leverage more valuable because of its characteristics?

 

A. Yes, in principle. Leverage from taking out a big loan would be worth a lot less than safe uncallable leverage from a steady self-renewing source of float like Fairfax's insurance business. Given the fact that float represents $28b at Fairfax, and equity is $26b (including non-controlling interests), and Fairfax is trading at only 1.1x book, you might say that Mr Market is giving very little value to that float, but I think it deserves a much more healthy premium. A huge loan that you never have to pay back is worth something.

 

 

Sounds like a moat.

[StubbleJumper]

4 hours ago, Hamburg Investor said:

What I don’t get: What would a 100% deflation hedge look like? I mean, what exacy is the definiton of „100%“ if it gets to currency inflation / deflation and its risk? I mean, I live in Germany and the culture memory of the „big depression“ in 1923 is very vivid. Hyper Inflation was some billion or trillion per cent in less than a year. People were paying a wheelbarrow full of bank notes for one bread. How do you derisk such situations or longterm high deflation?

 

Working from memory, FFH had something like US$115 billion of deflation derivatives.  What was that supposed to cover?  Take a look at the balance sheet, take a look at the income statement, and the notional amount of those derivatives far exceeded the sum of liabilities and the expenses.  So what exactly were they trying to "hedge?"  Clearly, if you had, say 15% deflation you could have an issue with your nominal indemnities growing in real value, so you might want to hedge a portion of that (rarely is your ideal hedge ratio even 100%).  But, to date, I have never read a compelling explanation about why the notional value of those derivatives exceeded the exposure to the underlying.  It's a little like owning 100 shares of a company and then "hedging" by buying 120 put options against those shares.

 

Anyway, I have spilled much ink about this over the past 6 or 7 years to the point where people are undoubtedly tired of my belly-aching.  But I take issue with the word "hedging" in this case because usually hedging implies a thoughtful, analytical approach to risk management.  But, 6 and 7 years ago, FFH wasn't using derivatives to manage risk, but rather to speculate (I use speculate in the nicest possible sense, as any time you buy a security you are speculating).

 

 

SJ

[SafetyinNumbers]

14 minutes ago, StubbleJumper said:

 

Working from memory, FFH had something like US$115 billion of deflation derivatives.  What was that supposed to cover?  Take a look at the balance sheet, take a look at the income statement, and the notional amount of those derivatives far exceeded the sum of liabilities and the expenses.  So what exactly were they trying to "hedge?"  Clearly, if you had, say 15% deflation you could have an issue with your nominal indemnities growing in real value, so you might want to hedge a portion of that (rarely is your ideal hedge ratio even 100%).  But, to date, I have never read a compelling explanation about why the notional value of those derivatives exceeded the exposure to the underlying.  It's a little like owning 100 shares of a company and then "hedging" by buying 120 put options against those shares.

 

Anyway, I have spilled much ink about this over the past 6 or 7 years to the point where people are undoubtedly tired of my belly-aching.  But I take issue with the word "hedging" in this case because usually hedging implies a thoughtful, analytical approach to risk management.  But, 6 and 7 years ago, FFH wasn't using derivatives to manage risk, but rather to speculate (I use speculate in the nicest possible sense, as any time you buy a security you are speculating).

 

 

SJ

At the time the hedges were put on there was real concern about negative interest rates. What’s float worth if interest rates are hugely negative? I think that’s what they were hedging so they could keep growing premiums. 

[Hamburg Investor]

2 hours ago, MMM20 said:

 

... 2000...?

[gfp]

17 minutes ago, Hamburg Investor said:

... 2000...?

 

The year 2000 wasn't a black swan event for Fairfax or Markel, but they both had just completed acquisitions (Crum & Forster & TIG at Fairfax and what became Markel International - Terra Nova, at Markel).  These acquisitions took longer to turn around and Markel had some newly acquired lines of business that they decided to discontinue.  So in both companies, I think the poor consolidated combined ratios you observed for 2000 were largely acquisition related.

[Hamburg Investor]

3 hours ago, gfp said:

 

The year 2000 wasn't a black swan event for Fairfax or Markel, but they both had just completed acquisitions (Crum & Forster & TIG at Fairfax and what became Markel International - Terra Nova, at Markel).  These acquisitions took longer to turn around and Markel had some newly acquired lines of business that they decided to discontinue.  So in both companies, I think the poor consolidated combined ratios you observed for 2000 were largely acquisition related.

Thanks. I just realize, that being an investor into Markel, Berkshire and Fairfax starting in 2007 and 2009 makes me a greenhorn here…  

[Hamburg Investor]

8 hours ago, UK said:

 

Thanks. Sure. But how did this reputation was any better in 2016 vs 2023? This makes no sense to me? So OK, maybe it is still far from perfect in the eyes of the market, maybe only halfway to being perfect, everybody is entitled to have an opinion, but it seems to me, anyway you look, reputation should be way better now, than in 2016? But valuation is not.

Even after 2016 on the surface Fairfax wasn‘t a big winner over some years. Looking back 15 years from 2016 growth might have been more spectacular against the market than looking back 15 years today.  
(I haven’t looked, just anticipating the brilliant hedge against the housing market around 2007/2009 and the longtime underperformance of Fairfax in the no-interest-growth-wins-time we look back today).

We can project earnings over the next couple of years and Vikings numbers are as good as they could be, but looking back Fairfax growth over 10 years hasn‘t shot the lights out.
 

And always remember: Mr. Market is doing the price. And he‘s not exactly famous for being rational.

[glider3834]

25 minutes ago, Hamburg Investor said:

Thanks. I just realize, that being an investor into Markel, Berkshire and Fairfax starting in 2007 and 2009 makes me a greenhorn here…  

some history on Markel's acquisitions here & interestingly they also were in advanced talks to acquire Allied World before it was acquired by Fairfax https://www.slipcase.com/view/inside-in-full-markel-trying-to-be-berkshire-without-buffett/12

[TwoCitiesCapital]

18 hours ago, SafetyinNumbers said:

I guess I misunderstood I thought it was the discussion of the moat that got us there. Using your mental model, I wouldn’t pay NAV+ for a levered bond fund. Would you?
 

Sure insurance is a commodity business but Fairfax gets to choose how much business it writes when prices are low. Effectively that’s part of the culture/cap allocation moat, isn’t it?

 

I’m curious for the people looking at the track record in CR, how can you tell how well the comps have been reserving vs Fairfax over time? If Fairfax, over reserves after every acquisition would that skew combined ratios higher? Do you track operating expense ratios vs comps to see if there is a delta in structural cost advantages?

 

You may not, but plenty of people do. Numerous instances over the years of fixed income CEFs trading at premiums to NAV despite having a significantly higher fee structure and cost of leverage than Fairfax has. 

 

I wouldn't pay a ton for access to leveraged bond management, but if the leverage is lower-cost than I can receive and higher quality (less callable) than I can receive then it's certainly worth something - especially in the hands of capable management who use it to generate reasonably good net returns. 

[Munger_Disciple]

8 hours ago, dartmonkey said:

Is it fair to say that unlike Buffett, you both don’t think float generating businesses are worth more than book value?

 

For my part, no, not at all, on the contrary. The float is the source of the leverage.

 

[SafetyinNumbers]

1 hour ago, TwoCitiesCapital said:

 

 

I wouldn't pay a ton for access to leveraged bond management, but if the leverage is lower-cost than I can receive and higher quality (less callable) than I can receive then it's certainly worth something - especially in the hands of capable management who use it to generate reasonably good net returns. 

I think you make great points which contributes to the moat. Another feature of Fairfax is that you know your optionality on the stock doesn’t get impaired by an opportunistic take-private bid from management. Arguably, the market gives Fairfax a discount for this feature as its participants are more interested in short term gratification.

[StubbleJumper]

24 minutes ago, SafetyinNumbers said:

I think you make great points which contributes to the moat. Another feature of Fairfax is that you know your optionality on the stock doesn’t get impaired by an opportunistic take-private bid from management. Arguably, the market gives Fairfax a discount for this feature as its participants are more interested in short term gratification.

 

 

I would encourage you to not hold this viewpoint very firmly.  The history of FFH would suggest that investors are best advised to ensure that their interests are aligned with Prem's interests to the greatest extent possible.  There have been numerous occasions when minority shareholders of subsidiaries have been unhappy with being bought out on terms that they viewed as unfavourable (in fact, just last week FFH announced it would buy back Farmers Edge.  Are the minority holders happy?  I haven't seen any feed back, but I don't doubt there would be some unhappiness).  Prem's interests are broadly clear as the result of his having the overwhelming majority of his personal assets in FFH shares (and not directly in the subs where shareholders believed they were screwed).

 

The advantage of being a minority shareholder of FFH is that it would require an absolute boatload of capital to buy us out.  But, if Prem could find somebody who would provide US$20-25 billion on favourable terms, I don't doubt for a minute that he would buy out minority holders if it were advantageous to the Watsa family.  What is more, Prem has advanced significant hints about large scale share repurchases and has even trotted out the Teledyne example.  If he actually follows through, in 10 years a family buyout might become more realistic.  In any case, it's not something to lose sleep over at the moment, but I would say that it's a mistake to assume that there will never be a take-private offer and that minority holders will never be screwed.

 

If you see a smiling shark, accept him for what he is.

 

 

SJ

[TwoCitiesCapital]

1 hour ago, StubbleJumper said:

 

 

I would encourage you to not hold this viewpoint very firmly.  The history of FFH would suggest that investors are best advised to ensure that their interests are aligned with Prem's interests to the greatest extent possible.  There have been numerous occasions when minority shareholders of subsidiaries have been unhappy with being bought out on terms that they viewed as unfavourable (in fact, just last week FFH announced it would buy back Farmers Edge.  Are the minority holders happy?  I haven't seen any feed back, but I don't doubt there would be some unhappiness).  Prem's interests are broadly clear as the result of his having the overwhelming majority of his personal assets in FFH shares (and not directly in the subs where shareholders believed they were screwed).

 

The advantage of being a minority shareholder of FFH is that it would require an absolute boatload of capital to buy us out.  But, if Prem could find somebody who would provide US$20-25 billion on favourable terms, I don't doubt for a minute that he would buy out minority holders if it were advantageous to the Watsa family.  What is more, Prem has advanced significant hints about large scale share repurchases and has even trotted out the Teledyne example.  If he actually follows through, in 10 years a family buyout might become more realistic.  In any case, it's not something to lose sleep over at the moment, but I would say that it's a mistake to assume that there will never be a take-private offer and that minority holders will never be screwed.

 

If you see a smiling shark, accept him for what he is.

 

 

SJ

 

If he's successful w/ the Teledyne example, in 10-years time it would take a boatload of money to buy out the remaining holders so I'm probably still ok with that. 

 

But agreed - invest in Fairfax subs/investments at your own risk. Their only allegiance is to their own shareholders and not those of their publicly traded associated entities. 

[SafetyinNumbers]

2 hours ago, StubbleJumper said:

 

 

I would encourage you to not hold this viewpoint very firmly.  The history of FFH would suggest that investors are best advised to ensure that their interests are aligned with Prem's interests to the greatest extent possible.  There have been numerous occasions when minority shareholders of subsidiaries have been unhappy with being bought out on terms that they viewed as unfavourable (in fact, just last week FFH announced it would buy back Farmers Edge.  Are the minority holders happy?  I haven't seen any feed back, but I don't doubt there would be some unhappiness).  Prem's interests are broadly clear as the result of his having the overwhelming majority of his personal assets in FFH shares (and not directly in the subs where shareholders believed they were screwed).

 

The advantage of being a minority shareholder of FFH is that it would require an absolute boatload of capital to buy us out.  But, if Prem could find somebody who would provide US$20-25 billion on favourable terms, I don't doubt for a minute that he would buy out minority holders if it were advantageous to the Watsa family.  What is more, Prem has advanced significant hints about large scale share repurchases and has even trotted out the Teledyne example.  If he actually follows through, in 10 years a family buyout might become more realistic.  In any case, it's not something to lose sleep over at the moment, but I would say that it's a mistake to assume that there will never be a take-private offer and that minority holders will never be screwed.

 

If you see a smiling shark, accept him for what he is.

 

 

SJ

I thought it was clear I was discussing FFH. Sorry for the misunderstanding. And no I don’t think he would ever take Fairfax private even if he had the resources to do so. I’m surprised you think that he would. Do you think Buffett would do the same to Berkshire?

[StubbleJumper]

14 minutes ago, SafetyinNumbers said:

I thought it was clear I was discussing FFH. Sorry for the misunderstanding. And no I don’t think he would ever take Fairfax private even if he had the resources to do so. I’m surprised you think that he would. Do you think Buffett would do the same to Berkshire?

 

 

I know you were talking about FFH and so was I!  There is little likelihood that FFH will go private, but never say never.  It would require a particular set of circumstances, and a lengthy period of buybacks would be a necessary precursor because the Watsa family's economic ownership is not currently all that high.  With a lengthy period of buybacks and a pile of outside capital, it could be possible.  Let's just say that if the Watsa family were in the situation of the Jackman family, my guess is that they'd have gone private five years ago...  My only caution is not to assume that we'll never see an opportunistic take-private bid from the Watsa family because my take is their constraint is currently financial capacity more than desire.

 

Buffett is clearly currently disposing of his BRK ownership, so there's no question of going private. 

 

 

SJ

[SafetyinNumbers]

45 minutes ago, StubbleJumper said:

 

 

I know you were talking about FFH and so was I!  There is little likelihood that FFH will go private, but never say never.  It would require a particular set of circumstances, and a lengthy period of buybacks would be a necessary precursor because the Watsa family's economic ownership is not currently all that high.  With a lengthy period of buybacks and a pile of outside capital, it could be possible.  Let's just say that if the Watsa family were in the situation of the Jackman family, my guess is that they'd have gone private five years ago...  My only caution is not to assume that we'll never see an opportunistic take-private bid from the Watsa family because my take is their constraint is currently financial capacity more than desire.

 

Buffett is clearly currently disposing of his BRK ownership, so there's no question of going private. 

 

 

SJ

Prem seems to be saying never 

https://financialpost.com/executive/capitalist-manifesto-how-capitalism-and-canada-made-prem-watsa

[StubbleJumper]

14 minutes ago, SafetyinNumbers said:

Prem seems to be saying never 

https://financialpost.com/executive/capitalist-manifesto-how-capitalism-and-canada-made-prem-watsa

 

 

Actually, what he's saying in that particular quote is that the Watsa family will never sell its interest to an outside party.  He's not saying that the Watsa family won't expand its interest, and possibly take it private some day.  In fact, a couple of days after that interview was conducted, FFH's substantial issuer closed and the Watsa family interest in FFH effectively increased by about 4% because they didn't tender any of their shares...

 

It's not anything that will happen any time soon.  But, it's always a remote possibility, and given how minority shareholders have been treated in other FFH transactions, that possibility should not be dismissed lightly.

 

 

SJ