Fairfax 2023

[Viking]

13 hours ago, petec said:

 

Viking: 

In 2024, operating income at Fairfax could come in around $200/share. This number is sustainable.

 

Petec: For three years, or long term? If you mean long term, what interest rates and CR do you need to get there? Genuinely interested and you're much closer to the numbers and modelling than anyone else, so value your view.

@petec i build my forecasts from the bottom up. You can see all my assumptions for 2024 and 2025. After 2025? Looking out 3 years or more i do not have any hard numbers. But for operating income, $200/share looks to me like a reasonable baseline to use. There will be lots of important puts and takes:
 

- share count: will likely come down, perhaps meaningfully (i think 2% per year is meaningful if sustained over many years)

- minority interest: Fairfax will likely continue to take minority partners out

- leverage: Fairfax will likely continue to use leverage. The GIG acquisition includes a sizeable ‘promissory note’

 

All three of these things will meaningfully impact the $200/share number looking out 5 years (and how much accrues to Fairfax shareholders). 
 

- net written premiums: my guess is this will continue to grow. Even if hard market ends? Yes. How? No idea, but GIG acquisition might provide a clue.

- size of fixed income portfolio: i expect this to continue to grow. $55 billion is not a crazy number looking out 5 years (it is $41 billion today).

- dividends: Eurobank could increase this by 50% in 2024. This bucket should grow nicely each year moving forward.

- share of profit of associates: Stelco is delivering close to zero today. Guess what it will deliver in the next steel up-cycle? Earnings at Poseidon/Atlas have been a mild headwind (underperforming); my guess is this will flip to a tailwind. More holdings will likely be coming into this bucket which would be another tailwind. The Hellenic Bank acquisition should be a big tailwind for Eurobank.

 

Now you asked about interest rate and CR. I don’t have a strong opinion about either. Perhaps rates move lower looking out 3 years. Or perhaps interest rates move higher again (perhaps we get a resurgence in inflation in 2H 2024 or 2025), which gives Fairfax the opportunity to lock in high rates for longer in another year or two. Or perhaps we get an event that causes credit spreads to blow out (like what happened to the regional banks but on a larger scale), and Fairfax flips to higher yielding corporates.

 

Perhaps the hard market continues to chug along. When the hard market ends perhaps it just goes sideways for 4 or 5 years (which i think is what usually happens). Perhaps Fairfax takes a bunch of the excess capital and buys back a bunch of stock and takes out some minority partners. 
 

Crisis and opportunity are different sides of the same coin. And Fairfax has excelled since 2018 at exploiting this relationship. I expect this to continue… i just can’t provide any details today of what they are going to do in 3 or 4 years time. 
 

You said in an earlier post that you felt the increase in interest rates was the primary driver of the increase in earnings at Fairfax. I couldn’t disagree more. My view is the biggest driver of earnings at Fairfax today are the collective decisions being made by the management team at Fairfax. Their many capital allocation decisions, some going back all the way to 2014.

 

Fairfax’s future results (including where operating income/share goes) depends primarily on the decisions the management team has made and will make moving forward. External factors (the path of interest rates and the insurance cycle) matter, but much less. This is where Fairfax differs from most other P/C insurers.

Edited December 23, 2023 by Viking

[Spekulatius]

On 12/19/2023 at 10:12 PM, Tommm50 said:

 

I don't believe lower CR's are driven by higher interest rates, if fact, the opposite. If an insurance company is not making income on the investment side it is forced to try to make it on the underwriting side i.e. lower CR's. I'm not sure the relationship to growth but growth is not as important as profit.

Yes all else being equal, higher interest rates should lead to higher CR because earnings from float should increase and that can compensate for higher CR’s.

 

Right now insurers have tailwind from both the hard market and higher investment income due to higher interest rates and I don’t think both will persist forever.

[Gregmal]

20 minutes ago, Spekulatius said:

Right now insurers have tailwind from both the hard market and higher investment income due to higher interest rates and I don’t think both will persist forever.

I don’t think you need it to because if it does, at 5x you get rich really quick.

[Viking]

3 hours ago, Spekulatius said:

Yes all else being equal, higher interest rates should lead to higher CR because earnings from float should increase and that can compensate for higher CR’s.

 

Right now insurers have tailwind from both the hard market and higher investment income due to higher interest rates and I don’t think both will persist forever.

@Spekulatius i agree that we will see some tailwinds turn into headwinds in the coming years. At the same time we will see some headwinds turn into tailwinds. Insurers are in the capital management business - and the well run companies will make adjustments. Fairfax likely has more options than any other P/C insurer.
 

I think the relationship between CR and interest rates is way more complicated than people think. Why?

1.) there is no insurance market. There are many insurance markets. Workers comp is still in a soft market - its hard market is likely coming. Personal (auto) has been a terrible business in recent years - and it is a very large market. Reinsurance (property cat) looks to be in a hard market. This is just for the US. Each region of the world also has its own unique characteristics. All these lines and regions have their own unique insurance cycle. Sometimes they line up and other times (like now) they do not. WR Berkley talked about this on one of their conference calls this year.

2.) interest rates are not having a significant impact on investment portfolios today. The Swiss Re Institute released a comprehensive study recently and they are projecting portfolio returns to tick modestly higher in both 2023 and 2024. Most P/C insurers were not positioned like Fairfax was in 2021 - so they are not seeing a spike in interest income. If interest rates go lower in 2H 2024 most insurers will likely have missed the big move higher.

I also think the whole CR/interest rate discussion matters way less for Fairfax compared to traditional P/C insurers.

3.) For Fairfax, today only 20% of their various income streams comes from underwriting profit and 80% comes from other sources (40% from interest and dividends, 20% from share of profit of associates and 20% from mark to market equities and investment gains). Underwriting profit is a much more important income stream for traditional P/C insurers. So even if the CR at Fairfax declines slightly in the coming years (this is not a given), given its small relative size, it will likely have a small impact on Fairfax’s total earnings - the total $ decline will likely easily be absorbed by another income stream. 
4.) everyone is laser focussed on interest income today. Guess what rarely gets discussed? Equities/non-interest bearing investments. Even at Fairfax. Why? Equities have been in a bear market - pretty much everything ex the magnificent seven. This will reverse. And when it does Fairfax will likely see some big gains from its equity portfolio - likely +$2 billion in one year.

 

And to really blow your mind (love the Matrix movie), try and forecast these individual buckets with precision looking out 3 or 4 years. 

Edited December 25, 2023 by Viking

[Hoodlum]

In the official press release from today, Fairfax plans to buy the remaining 10% of GIG in Q1. 
 

https://www.fairfax.ca/press-releases/fairfax-successfully-completes-acquisition-of-additional-46-32-interest-in-gulf-insurance-group-from-kipco-2023-12-26/

[Junior R]

Quote

Fairfax Announces Early Redemption of Fairfax (US) Inc. Senior Notes Due August 13, 2024

https://www.fairfax.ca/press-releases/fairfax-announces-early-redemption-of-fairfax-us-inc-senior-notes-due-august-13-2024-2023-12-28/

[KPO]

1 minute ago, juniorr said:

https://www.fairfax.ca/press-releases/fairfax-announces-early-redemption-of-fairfax-us-inc-senior-notes-due-august-13-2024-2023-12-28/

Why would they redeem 4.875% notes 8 months early only three weeks after issuing 6.0% notes? Odd. 

[Junior R]

3 minutes ago, KPO said:

Why would they redeem 4.875% notes 8 months early only three weeks after issuing 6.0% notes? Odd. 

The issuing of debt 3 weeks ago was probably to pay back this and extend the duration 

 

Quote

Fairfax intends to use substantially all of the net proceeds of this offering to repay outstanding indebtedness of Fairfax or its subsidiaries with upcoming maturities and use any remainder for general corporate purposes.

 

[KPO]

5 minutes ago, juniorr said:

The issuing of debt 3 weeks ago was probably to pay back this and extend the duration 

 

 

It seems kind of strange in an environment where rates are likely to decline from here plus their credit profile should continue to improve leading to a lower premium over the risk free rate. Oh well, I guess they can’t get everything right. 

[dealraker]

Interestingly my decision in the 1990's to invest with Prem Watsa and Fairfax was somewhat based on valuation but mostly all about reading about the people and the business.  I had Berkshire and Markel as the models of course, otherwise nothing would have made much sense or been seen as attractive for investment.

 

Through the years I've thought a little, but not a lot, about some of what Fairfax was doing investment wise and it wasn't something I was interested in nor thought was much of a good idea.  But I never lost faith that it would end up all being ok so I stuck around.  I do like the long tail insurance business but I don't want a whole bunch of money in it.

 

In the last three years I've steadily added to the position, including last week.  But for me, while I read all posted here, I'm just a believer regardless.  As I mentioned before, the fact that I got to invest in Hub (the broker) because being a shareholder made me aware of it, was such a massive jolt for me financially--- it simply makes the names Prem/Fairfax something I'm a "lifer" to hold.  Nothing but positive association in my head.  

[StubbleJumper]

1 hour ago, KPO said:

Why would they redeem 4.875% notes 8 months early only three weeks after issuing 6.0% notes? Odd. 

 

 

Well, you don't necessarily want to wait until the last minute.  I was a bit surprised that FFH was even able to float debt at 6% when you could instead lend money to the Government of the United States for ~5%, so in some respects, it was a good time for them to seek credit.  In fact, they probably ought to have borrowed a bit more so the holdco could improve its balances of actual cash (not the imaginary cash outlined in Note 5 of the financials).

 

SJ

[Viking]

What was the change in the value of Fairfax’s equity portfolio in Q4, 2023?

 

Fairfax’s equity portfolio (that I track) has a total value of about $17.5 billion at December 31, 2023. This is an increase of about $901 million (pre-tax) or 5.4% from September 30. The increase in the quarter works out to about $39/share.

 

Currency, which has been a headwind for the past couple of years turned into a tailwind in Q4.

 

Please note, I include holdings like the FFH-TRS position in the mark to market bucket and at its notional value. I also include debentures and warrants in this bucket.

 

To state the obvious, my tracker portfolio is not an exact match to Fairfax’s actual holdings. It also does not capture changes in the value of private holdings – which are significant. It also does not capture changes Fairfax has made to its portfolio during the quarter that are not reported. As a result, my tracker portfolio is useful only as a tool to understand the likely directional movement in Fairfax’s equity portfolio (and not the precise change).

  

 

Split of total holdings by accounting treatment

 

About 49% of Fairfax’s equity holdings are mark to market - this includes 'A.) Mark to Market' and 'D.) Other Holdings' - and will fluctuate each quarter with changes in equity markets. The other 51% are Associate and Consolidated holdings.

 

 

Split of total gains by accounting treatment

 

The total change is an increase of $901 million = $39/share

The mark to market change is increase of $237 million = $10/share. Only changes in this bucket of holdings will show up in ‘net gains (losses) on investments’ (along with changes in the value of the fixed income portfolio) when Fairfax reports results each quarter.

 

 

What were the big movers in the equity portfolio in Q4?

• Eurobank was up $273 million and is now Fairfax’s largest equity holding - a $2.1 billion position for Fairfax. The shares still look like they are dirt cheap, closing the year at €1.61. This holding looks primed to have another good year in 2024. 
• The FFH-TRS was up $200 million. This position is up a total of $1.07 billion over the last 3 years, which is a gain of almost 150%. Simply an amazing investment.
• Stelco was a strong performer, up $134 million. It will be interesting to see if we get more consolidation in the North American steel industry in 2024. 
• Fairfax India (finally) got some love from investors in Q4 and was up $126 million. This high quality holding continues to fly under the radar of most investors. 
• International holdings - Thomas Cook India, Quess and Commercial Industrial Bank – all had strong gains in Q4
• Blackberry was the biggest under-performer, down $55 million. In Q4, Fairfax significantly reduced the size of its investment in Blackberry by reducing the debenture position from $365 to $150 million. The stock position is worth a total of $165 million. 

 

 

Excess of fair value over carrying value (not captured in book value)

 

For Associate and Consolidated holdings, the excess of fair value to carrying value is about $1.0 billion or $45/share (pre-tax). Book value at Fairfax is understated by about this amount (less the tax impact). What is the split?

• Associates:       $668 million = $29/share
• Consolidated:   $348 million = $15/share

Below is a copy of my Excel spreadsheet (next 2 pages) if you want a closer look.

 

Equity Tracker Spreadsheet explained:

 

The summary below attempts to track all equity holdings at Fairfax. Each quarter the spreadsheet is updated to capture any ‘new news:’ purchases and sales. 

 

We have separated holdings by accounting treatment:

• Mark to market
• Associates – Equity accounted
• Consolidated
• Other Holdings (also mark to market) – derivatives (total return swaps), debentures and warrants

We come up with the value of each holding by multiplying the share price by the number of shares. Are holdings are tracked in US$, so non-US holdings have their values adjusted for currency. 

 

Important: the list is not complete. Some information we only get once per year when Fairfax published their annual report. Fairfax also makes changes to their portfolio each quarter. 

 

 

Fairfax Dec 31 2023.xlsx

Edited December 30, 2023 by Viking

[gary17]

On 2/17/2023 at 12:16 PM, gary17 said:

i get confused with if people are using CAD and USD in their messages.  I think this company should be around $1500 cad- $2000 per share 

 

 

Somebody posted in the FFH new all time high what price to sell.  This was my thought about 18 months ago.  I have therefore trimmed my ownership.