Fairfax 2023

[Xerxes]

2 minutes ago, StubbleJumper said:

 

Would you want to do that?  Really, you just want your capital back with a return.  Foreclosing on actual real estate and hoping you can eventually sell it to get your capital back doesn't sound so enticing.

 

 

Sj

foreclosing on the actual real estate should be a “ohh damn the thesis just changed moment, but looks like I got some insurance, for what is worth”

[Crip1]

2 hours ago, MMM20 said:

 

In a downside case where cap rates double or whatever, can't KW/Fairfax foreclose and just hold the properties?

Can they? Yes. Anyone lending money on real estate can do that. However, there's a lot of cost involved with foreclosing and re-selling. Virtually no entity who lends on real estate wants to own said real estate, be it residential or commercial. I think, that the point you're making is that foreclosure does limit downside so that the investment will technically not go to zero, but that's risk limitation, not elimination.

[MMM20]

32 minutes ago, StubbleJumper said:

Would you want to do that?  Really, you just want your capital back with a return.  Foreclosing on actual real estate and hoping you can eventually sell it to get your capital back doesn't sound so enticing.

Just thinking though downside scenarios. Does anyone know if the KW vehicles are set up in such a way that, worst case, Fairfax can hold indefinitely? If I’m an insurance company I might want to just go team #neversell on some quality real estate anyway. Of course there are opportunity costs and let’s hope we don’t end up with real estate broadly cut in half but better not to be forced sellers in such a scenario.

 

Edited December 7, 2023 by MMM20

[Viking]

From a capital allocation standpoint, what has been Fairfax’s most impactful decision in 2023? 
1.) (pending) GIG acquisition?

2.) increase in average duration of fixed income portfolio from 1.6 to 3.1 years?

3.) expansion of relationship with Kennedy Wilson?

4.) other?
 

My vote today would be 2.). 
 

But my guess is we are still in the early innings of understanding what is happening with Kennedy Wilson. Fairfax is aggressively expanding in what is probably the most hated sector of the economy today. Very opportunistic.

Edited December 7, 2023 by Viking

[glider3834]

4 hours ago, Viking said:

From a capital allocation standpoint, what has been Fairfax’s most impactful decision in 2023? 
1.) (pending) GIG acquisition?

2.) increase in average duration of fixed income portfolio from 1.6 to 3.1 years?

3.) expansion of relationship with Kennedy Wilson?

4.) other?
 

My vote today would be 2.). 
 

But my guess is we are still in the early innings of understanding what is happening with Kennedy Wilson. Fairfax is aggressively expanding in what is probably the most hated sector of the economy today. Very opportunistic.

+1 

 

their TRS has generated ~US$600M YTD before swap fees & assuming its still open - so I would add that to list

Edited December 8, 2023 by glider3834

[Gregmal]

Ok so on KW, because to me, KW seems to be something that falls into the “old Fairfax” bucket…it’s one of those companies that has the Fairfax halo and thus over the years has tended to trade at an undeserved premium. They own some pretty unremarkable assets, in some pretty lousy locations, and I’ve never spent much time going past surface level analysis with it because it’s just so obviously unappealing almost immediately. Why is Fairfax still here and what’s the point in going forward this route versus something more independent or sensible from an investment standpoint?

[Jaygo]

Agreed. When you look at colliers ect. Kw seems like picking the runner up just because there is some history. 

[Thrifty3000]

On 12/7/2023 at 7:51 AM, gfp said:

Here are the two KW filings for those that can't read the small print in netcash1's post.  SJ, I thought 10% Pacificorp debt sounded pretty wild even with the wildfire liabilities but realized you meant PacWest LOL...

 

https://otp.investis.com/clients/us/kennedy_wilson1/SEC/sec-show.aspx?Type=html&FilingId=17105470&CIK=0001408100&Index=10000

 

https://otp.investis.com/clients/us/kennedy_wilson1/SEC/sec-show.aspx?Type=html&FilingId=17105435&CIK=0001408100&Index=10000

Back of the envelope, I estimate this will increase the earning power of the bond portfolio by around $5 per share. (I’m assuming less than 2% loss provision, but pulled that out of the air.)

[gfp]

1 hour ago, Thrifty3000 said:

Back of the envelope, I estimate this will increase the earning power of the bond portfolio by around $5 per share. (I’m assuming less than 2% loss provision, but pulled that out of the air.)

 

Are you assuming $5 per share is the incremental earning power of the additional $2 Billion loan investment (if it actually gets invested, this is just a commitment, not deployed) over that hypothetical $2 Billion being invested in a T-bill currently or are you assuming that hypothetical $2 Billion loan investment is earning zero currently?

[Hoodlum]

This was an interesting read on the impact of losses from Severe Convective Storms (SCS) on reinsurance losses.  SCS losses have increased on average 7% annually over the past 30 years and have a record $60B loss ($50B of which was in the US) in 2023. 
 

While more focus is placed on the one time events of Hurricanes and Earthquakes, it was interesting to see how these these storms have been adding up to a more  significant portion of Property losses and continue to grow a a high rate, helping to extent a hardening of the market. 
 

https://www.globalreinsurance.com/home/swiss-re-scs-losses-reach-record-60bn-in-2023/1447322.article

[Viking]

Here is an update on what Fairfax has done with share buybacks over the past 5.75 years. 

 

The big picture

 

Three factors drive stock returns over the long term:

• earnings
• multiple
• shares outstanding

The last factor is often ignored by investors.

 

Capital allocation

 

Capital allocation is the most important function of a management team and stock buybacks are one of many options that are available.

 

Share buybacks can be very beneficial for shareholders if they are done in a responsible manner (purchased at attractive prices) and sustained over many years.

 

It is counterintuitive, but for long term shareholders a low share price can be a big benefit - if the company is buying back shares and in a significant quantity. Especially if it persists for years.  

 

How does Fairfax approach buybacks?

 

Prem laid out Fairfax’s strategy regarding share buybacks in the 2018 annual report:

 

“I mentioned to you last year that we are focused on buying back our shares over the next ten years as and when we get the opportunity to do so at attractive prices. Henry Singleton from Teledyne was our hero as he reduced shares outstanding from approximately 88 million to 12 million over about 15 years.” Prem Watsa – Fairfax 2018AR

 

Fairfax approaches stock buybacks from the framework of a value investor: buy back shares when they are cheap and back up the truck when they are really cheap.

 

What has Fairfax been doing in recent years?

 

Fairfax’s year-end ‘effective shares outstanding’ peaked in 2017 at 27.75 million. Fairfax issued a total of 7.2 million shares in 2015, 2016 and 2017 to help fund its aggressive international expansion in insurance. The new shares were issued at an average price of about $462/share.

 

At September 30, 2023, the ‘effective shares outstanding’ at Fairfax had fallen to 23.1 million shares. Over the last 5.75 years (2018-Sept 2023), Fairfax has reduced its share count by approximately 4.6 million shares or 16.7%.  The average price paid to buy back shares was about $474/share.

 

The average price paid for the shares repurchased by Fairfax over the past 5.75 years is slightly higher than the price that shares were issued at from 2015-2017. Fairfax’s book value at Sept 30, 2023 was $876.55/share. Fairfax has been able to buy back a significant number of shares at a very attractive average price - well below intrinsic value (more than 50% below current intrinsic value?).

 

The big share re-purchase was in December 2021, when Fairfax executed a Dutch auction and purchased 2 million shares at US$500/share at a total cost of $1 billion. To fund the purchase, Fairfax sold 10% of Odyssey for US$900 million. The management team at Fairfax was both creative and opportunistic in executing this transaction.

 

Fairfax has been buying back shares, and in volume, the past couple of years because, at the time of purchase, they felt the shares represented outstanding value. Pretty simple. Rational. Very shareholder friendly.

 

What have we seen so far in 2023?

 

Fairfax lowered ‘effective shares outstanding’ by 209,000 shares in the first nine months of 2023. The pace so far in 2023 is below that of the past few years. My current forecast is that Fairfax will reduce effective shares outstanding by about 300,000 shares in 2023.

 

With Fairfax’s share price currently trading at around $900 it will be interesting to see what Fairfax does with share buybacks moving forward.

 

 

—————

Fairfax’s total return swaps (TRS) on 1.96 million Fairfax shares

 

Some investors consider this investment to represent a buyback of sorts. Here is an update on this holding. It is turning into one of Fairfax’s best investments ever.

 

The TRS-FFH has increased in value by about $1.06 billion, or more than 145% over 36months (not including the costs to maintain the position).

 

 

 —————

What does Warren Buffett have to say about share buybacks?

 

“A very minor gain in per-share intrinsic value took place in 2022 through Berkshire share repurchases as well as similar moves at Apple and American Express, both significant investees of ours. At Berkshire, we directly increased your interest in our unique collection of businesses by repurchasing 1.2% of the company’s outstanding shares. At Apple and Amex, repurchases increased Berkshire’s ownership a bit without any cost to us.

 

“The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices. Just as surely, when a company overpays for repurchases, the continuing shareholders lose. At such times, gains flow only to the selling shareholders and to the friendly, but expensive, investment banker who recommended the foolish purchases.

 

“Gains from value-accretive repurchases, it should be emphasized, benefit all owners – in every respect. Imagine, if you will, three fully-informed shareholders of a local auto dealership, one of whom manages the business. Imagine, further, that one of the passive owners wishes to sell his interest back to the company at a price attractive to the two continuing shareholders. When completed, has this transaction harmed anyone? Is the manager somehow favored over the continuing passive owners? Has the public been hurt?

 

“When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive).”

 

Warren Buffett - Berkshire Hathaway 2022AR

 

 

Edited December 11, 2023 by Viking

[Thrifty3000]

On 12/9/2023 at 3:11 PM, gfp said:

 

Are you assuming $5 per share is the incremental earning power of the additional $2 Billion loan investment (if it actually gets invested, this is just a commitment, not deployed) over that hypothetical $2 Billion being invested in a T-bill currently or are you assuming that hypothetical $2 Billion loan investment is earning zero currently?

Yes. I was at my son's basketball game and while he was on the bench I did a super-back-of-the-envelope estimate just to see how much of a per share impact we were actually talking about. Basically just started out with the highest level round numbers:

 

- I gave FFH the benefit of the doubt and assumed a nice round $200 mil earnings potential

- Subtracted opportunity cost of, say, $80 mil for what the $2 bil could alternatively earn in treasuries

- Took the resulting $120 mil and divided by 23 million shares

- Which came out to a little north of $5 per share.

 

So, that's usually enough info for me after a first pass impact assessment, where I just want to quickly understand if we're talking about pennies per share, dollars per share, or tens of dollars per share.

 

You can then go in and add whatever other variables to the mix you want, which would likely pull the estimate down a buck or two, but it's not a level of detail I'm going to worry about.

Edited December 11, 2023 by Thrifty3000

[Thrifty3000]

Good news. FFH's Price to Book Value ratio has solidly expanded this year. Here are the numbers (using GAAP for 2020 and 2021).

 

Dec 31, 2020= .71

Dec 31, 2021= .78

Dec 31, 2022= .78

Dec 13, 2023 (Estimate)= 1.0

 

I have a hunch the strong upward trend isn't going to stop at 1. I'll be surprised if we don't hit 1.2 in the next 2 years.

 

A new baseline of $150+ EPS is especially exciting when you apply a 1.2x multiple and compare the result to today's stock price. #stillCheapAF

 

[Viking]

This is shaping up to be a pretty interesting quarter for Fairfax on the earnings front.

 

The shift to 3.1 years average duration in October is looking better and better. The massive move in bond yields the past 7 weeks should result in significant unrealized gains in the fixed income portfolio. Offsetting this will likely be a big drop in the IFRS-17 bucket (if I am understanding this properly). Does anyone have an opinion on size/magnitude of either move?

 

The next thing to watch might be Fairfax's stock portfolio - if we get a stock market rally into year end.

 

Hopefully the GIG acquisition closes before year end. But not a big deal if it is pushed into 2024.

 

[Thrifty3000]

If we assume BV grows by $150 per share annually for the next 3 years then depending on which year P/BV hits 1.2x your compound annual return from today's price would be as follows:

 

If P/BV is 1.2x on Dec 31 2024: approx 40% CAGR!

If P/BV is 1.2x on Dec 31 2025: approx 26% CAGR

If P/BV is 1.2x on Dec 31 2026: approx 21% CAGR

 

Of course, if P/BV is still a sad and lowly 1x BV by Dec 31 2026: approx 14% CAGR

 

And, if P/BV reverts to the 2020 level you're looking at a Dec 31 2026 CAGR of approx 2% (buying opportunity!)

[Hoodlum]

The GIG sale has now closed. 
 

https://www.zawya.com/en/press-release/companies-news/kipco-completes-the-sale-of-its-46-stake-in-gig-to-fairfax-financial-holdings-yi3hmkx4?amp=1

Edited December 14, 2023 by Hoodlum

[gfp]

16 hours ago, Viking said:

The next thing to watch might be Fairfax's stock portfolio - if we get a stock market rally into year end.

 

At this point it's almost like, "what stock portfolio?"  A little bit of Micron and some OXY but if you don't include the stuff that isn't marked to market Fairfax has a tiny stock portfolio compared to total investments.  A couple billion total or something like that?

[OCLMTL]

3 hours ago, Hoodlum said:

The GIG sale has now closed. 
 

https://www.zawya.com/en/press-release/companies-news/kipco-completes-the-sale-of-its-46-stake-in-gig-to-fairfax-financial-holdings-yi3hmkx4?amp=1

Can someone remind me the float impact of this transaction closing please? thanks!

[gfp]

18 minutes ago, OCLMTL said:

Can someone remind me the float impact of this transaction closing please? thanks!

 

I believe GIG had around $2 Billion USD in "float" at yearend 2022.  I don't know if any portion of this was previously "counted" as Fairfax float but I doubt it.

[value_hunter]

Any news for big drop(3%+) today?

[gfp]

10 minutes ago, value_hunter said:

Any news for big drop(3%+) today?

 

So insurance companies like BRK and FFH are down presumably because high interest rates are over.  Fairfax of course has locked in decent yields for 3-4 years but the average market participant isn't real up to date on Brian Bradstreet's moves.  Berkshire of course hasn't locked in shit - all t-bills as far as we know.

[Viking]

51 minutes ago, value_hunter said:

Any news for big drop(3%+) today?

 

The whole sector is selling off pretty hard. P&C insurance sector has been a pretty strong performer lately. The sell off is probably interest rate related and also a shift from defensive sectors (P&C insurance) to risk-on sectors.

 

Fairfax was very weak earlier today and it has since bounced back a little.

 

 

Edited December 14, 2023 by Viking

[Munger_Disciple]

I read somewhere that the 2024 premium increases do not appear to be that great for insurers and reinsurers so there is some fear that we are nearing the end of a hard market for renewals. 

[Santayana]

I just renewed a policy for my small business, and Chubb was able to quote me a rate about 35% less than The Hartford was asking.  The Hartford quote was a 10% increase on what they charged last year.

 

[Thrifty3000]

2 hours ago, value_hunter said:

Any news for big drop(3%+) today?

 

Industrywide beatdown: