Q3 results

[Santayana]

It's a gift to those that are still accumulating a position to have it trading where it is now.  My belief regarding all of the relative inattention from the analysts and markets is simply that Fairfax isn't trading on a major US exchange. It's some some random P&C insurer in Canada, who cares?

[MMM20]

On 11/6/2023 at 11:43 AM, vinod1 said:

You guys are seriously bitching that market is not recognizing Fairfax after a 100% run up in an year? 

Hard to complain but the frustration is that I’ve been right on the fundamental inflection and the earnings power has ramped massively higher… and yet if you do the work you see that the valuation is basically the same depressed level as ~1-2 years ago. I think valuation on that earnings power easily would’ve doubled by now in most situations like this, and then FFH would already be a ~5x sort of investment to US$1500-2000 and everyone could transact at a fair enough price, which to Buffett’s point is what a company should really want for itself and its shareholders - yes, even if it means the company can’t buy back as many shares quite so cheap. And then I could then trim a bit to take advantage of lots of bargains elsewhere these days, which definitely wasn’t the case ~2 years back. I’d rather not cut the flowers yet when I’m quite convinced fair value is at least 100% higher and that leaves me very concentrated at a time when there are a lot of cheap stocks and I really should probably diversify so I'm a bit more robust. So yeah, there’s the cognitive dissonance. High class problem, fine, fair point. 
 

But maybe Mr Market is starting to catch on, and if buybacks really ramp, we should benefit in a major way from the cheapness, even though some Toronto widow is losing out if she needs to sell a share to pay for groceries and heat this month. We know the company understands and admires the Teledyne case and is now willing and able to take advantage of widows... the haters are right, Prem is a bad guy! 

 

Edited November 7, 2023 by MMM20

[Munger_Disciple]

A couple of questions for Fairfax experts:

1. I was going through the cashflow statement in Q3 report. At first glance, it seemed odd that the cashflow from operations for the first nine months was negative $1B. Then I realized it was due to the line item called "Net purchases of investments classified at FVTPL". I would think purchases of investments would belong in investing activities, not operating activities? Is it related to adoption of IFRS?
2. Why do they classify share buybacks into two separate line items, i.e., purchases for treasury and purchases for cancellation?

Thanks in advance.

Edited November 9, 2023 by Munger_Disciple

[Cigarbutt]

6 hours ago, Munger_Disciple said:

A couple of question for Fairfax experts:

1. I was going through the cashflow statement in Q3 report. At first glance, it seemed odd that the cashflow from operations for the first nine months was negative $1B. Then I realized it was due to the line item called "Net purchases of investments classified at FVTPL". I would think purchases of investments would belong in investing activities, not operating activities? Is it related to adoption of IFRS?
2. Why do they classify share buybacks into two separate line items, i.e., purchases for treasury and purchases for cancellation?

Thanks in advance.

Rapid answers (possibly wrong and not expert-like).

1. This seems like a reporting requirement and the 2022 annual report had the following to help adjust if need be:

"Cash provided by operating activities (excluding operating cash flow activity related to investments recorded at FVTPL) increased to $1,469.6 in 2022 from $1,352.0 in 2021 primarily reflecting increased net premium collections, partially offset by increased net claims paid at Crum & Forster and increased net taxes paid at Northbridge."

2. This seems related to a historical decision to purchase for treasury in order (not to cancel them) to use the shares so purchased for share-based compensation.

[Munger_Disciple]

Thanks @Cigarbutt!

[glider3834]

7 hours ago, Munger_Disciple said:

A couple of question for Fairfax experts:

1. I was going through the cashflow statement in Q3 report. At first glance, it seemed odd that the cashflow from operations for the first nine months was negative $1B. Then I realized it was due to the line item called "Net purchases of investments classified at FVTPL". I would think purchases of investments would belong in investing activities, not operating activities? Is it related to adoption of IFRS?
2. Why do they classify share buybacks into two separate line items, i.e., purchases for treasury and purchases for cancellation?

Thanks in advance.

I am not an expert but I think under IFRS 9 if Fairfax's business model is managing certain financial assets for changes in fair value (see below) it would classify them at FVTPL assets - purchases & sales of these FVTPL investments appear under operating activities.

 

 

These FVTPL designated investments are different to investments in associates, subsidiaries, real-estate, P&E or intangibles (see below) where purchases or sales of these assets appear under investment activities. 

 

 

 

Edited November 9, 2023 by glider3834

[Munger_Disciple]

Thanks @glider3834!

[Viking]

On 11/6/2023 at 9:48 AM, Viking said:

RBC sent out their research report on Fairfax last night. It was pretty positive on the company - with earnings estimates increased. Price target was increased by US$40 to US$1,020. But there was one head scratcher for me... they feel Fairfax should be valued at 1 x BV. Really? After what we have seen Fairfax deliver over the past 3 years? And how they are poised moving forward? So late last night I decided to ask RBC (Scott) what he is seeing that I am missing. I'll let you know if/how he responds.

----------

RBC increased price target for Fairfax to US$1,020 (based on 1 x 2024YE book value). They forecast EPS of $151 in 2023 (up from $135), $140 in 2024 (up from $130) and $150 for 2025 (new).

From: Viking

Subject: Fairfax Question

Date: November 5, 2023 at 11:57:09 PM PST

To: scott.heleniak@rbccm.com

 

Hello Scott. I am a long time RBC customer. I always enjoy reading your weekly research report on insurance and the companies in the P/C insurance space. It is a sector i have followed for about 20 years. I follow Chubb, WR Berkley and Fairfax pretty closely. Currently I only own shares in Fairfax.

 

I have a question on Fairfax. Why do you have a price target of 1 x 2024YE book value? Clearly you are seeing something that I am missing. And I can’t pick it up reading your report (lots of good news and increases in estimates - similar to past quarters). My experience is P/C insurance companies that receive a 1 x BV multiple are ‘problem children:’ expected to deliver poor returns and are also poorly managed.

 

My math says Fairfax will deliver an ROE of around 20% in 2023. Based on your earnings estimates for 2024 and 2025 (which are not aggressive) the company should deliver a mid-teens ROE. That would put them +15% average over 3 years. In 2022, Fairfax’s performance was best-in-class among P/C insurers (they actually grew BV). Weaving it all together, that type of performance (past and expected) is worth a multiple of 1 x 2024 BV? 

 

Fairfax is trading at a PE of 6 x earnings. With solid earnings expected in 2024 and 2025. That also looks very low (i.e. the stock looks very cheap at $900). Based on your earnings estimate, Fairfax will earn close to 50% of its market cap in three years (2023-2025). That type of actual and expected earnings is ‘worth’ a multiple of 1 x 2024BV?

 

Is the issue poor operating earnings?

• From 2016-2020 the average for operating earnings was $1 billion per year. 
• In 2021 it doubled to $1.8 billion.
• In 2022 it tripled to 3.1 billion.
• In 2023 it is tracking to quadruple to $4.3 billion.
• In 2024 it will likely increase further (driven by interest income) to +$4.5 billion. 

My guess is the increase in operating earnings we are seeing with Fairfax is best-in-class among P/C insurers.

 

Operating income = underwriting profit + interest and dividend income + share of profit of associates

 

Is the issue capital allocation?

• In late 2020 and early 2021 they initiated the total return swap position giving exposure to 1.96 million Fairfax shares. Their average cost was $372/share. This investment has made Fairfax shareholders over $1 billion in less than 3 years. 
• In late 2021, Fairfax bought back 2 million shares at US$500/share. With shares trading today at $900 that is looking like a spectacular move for shareholders. (Total share count has come down more than 16% over the past 5 years.)
• In 2022, Fairfax sold their pet insurance business for $1.4 billion. This delivered shareholders a $992 million after tax gain. another big win for shareholders.
• In 2022, they sold their position in Resolute Forest Products for $626 million (plus $183 million CVR). They sold Resolute at the top of the lumber cycle; great decision for shareholders.
• In 2023, Fairfax announced they will be buying out partner Kipco to take their ownership in GIG to 90%. Smart strategic acquisition. When this transaction closes later this year it will significantly boost Fairfax’s insurance premiums and the investment portfolio. Another significant and solid move.

Fairfax also owns one of the fastest growing insurers in India - Digit. They seeded this company as a start-up in 2017 and their investment of $154 million is now worth over $2 billion. This positions Fairfax very well in what is expected to be the fastest growing economy in the world over the next decade (India).

 

I could list many more examples… but I think you get my point. But wait, here is one more example… 

 

The best ‘capital allocation’ decision they have made in recent years is how they have navigated the bear market in bonds.

 

They moved their $37 billion fixed income portfolio to 1.2 years average duration in late 2021 (sold their corporate bonds at a 1% yield and shifted to short term treasuries). In October of this year they have moved their $41 billion fixed income portfolio to 3.1 years average duration. These two moves were brilliant. They protected the company’s balance sheet (unlike other insurers, book value per share has grown meaningfully at Fairfax the last 2 years). And they now allow Fairfax to spike interest income - which doubled in Q3, 2023 compared to prior year. Fairfax is seeing a much quicker earn through to interest income from higher interest rates than other P/C insurers. A big win for shareholders.

 

Is the issue quality of management? 

 

Well given the most important function for a management team is capital allocation, I can’t see a problem here (given what Fairfax has actually accomplished the past 5 years and especially the past 3 years). 

 

Is the issue Fairfax’s past?

 

Yes, Fairfax messed up pretty badly from 2010-2016. However, it recognized its mistakes and got to work to fix them - and fixed them. It took a couple of years to turn the super tanker. From about 2018 Fairfax has been executing exceptionally well. 

 

When I weave it all together I see a company that is firing on all cylinders (insurance and investments). Most importantly, it is delivering a record amount of quality operating earnings and strong earnings overall - and extending the average duration of the bond portfolio to 3.1 years ensures interest income will be strong for the next three years. Fairfax's prospects have never looked better. Yes, the stock has been one of the best performing financial stocks over the past 3 years (up more than 200%). But the fundamentals have also been significantly improving. So even at US$900, the stock continues to look very undervalued. 

 

So again, I come back to my original question. A company that has delivered all that I quickly outlined above is worth 1 x 2024BV? I think you are a very hard marker Or, more likely, you see something that I am missing. 

 

I try and be inquisitive and open minded. Clearly, I am not understanding something important regarding Fairfax. I would appreciate any feedback you are able to provide. 

 

Regards.

 

Viking

 

----------

 

 

I received a response to my question to RBC regarding why they valued Fairfax at 1 x BV. Copied below is their response. I was impressed they got back to me. 

----------

On Nov 8, 2023, at 6:41 AM:

 

Hi (Viking),

 

Fairfax has never traded with the peers you are citing (most of the time has been below book in recent years).  I think there are a few factors to consider including Fairfax being a more complex business vs. some peers in terms of where they write business, international (not U.S. or Bermuda based), larger non-insurance exposures that can have volatility, larger equity exposures, track record, not trading on major U.S. exchanges, little analyst coverage. I don’t dispute your points but these are a few reasons (those could change over time) – not about the fundamentals of the business right now. Thanks for the email. 

 

Best,

Scott

[SafetyinNumbers]

20 minutes ago, Viking said:

 

I received a response to my question to RBC regarding why they valued Fairfax at 1 x BV. Copied below is their response. I was impressed they got back to me. 

----------

On Nov 8, 2023, at 6:41 AM:

 

Hi (Viking),

 

Fairfax has never traded with the peers you are citing (most of the time has been below book in recent years).  I think there are a few factors to consider including Fairfax being a more complex business vs. some peers in terms of where they write business, international (not U.S. or Bermuda based), larger non-insurance exposures that can have volatility, larger equity exposures, track record, not trading on major U.S. exchanges, little analyst coverage. I don’t dispute your points but these are a few reasons (those could change over time) – not about the fundamentals of the business right now. Thanks for the email. 

 

Best,

Scott

That’s great. He didn’t respond to me when I sent him the podcast.

 

He cites a lot of of factors that have nothing to do with intrinsic value. 
 

My market model is Market Value = Intrinsic Value + Social Value.

 

Social Value can be positive or negative. For Tesla it’s hugely positive. For Fairfax, it’s hugely negative. I only invest in things with negative SV. The big downside of that approach is that the cost of equity capital is high which means less flexibility and more risk.

[Luca]

Well, he said it himself, its not about the fundamentals but past mistakes and "complexity". I would have expected their analysis was based on fundamentals haha! 

[Tommm50]

36 minutes ago, Viking said:

I think there are a few factors to consider including Fairfax being a more complex business vs. some peers in terms of where they write business, international (not U.S. or Bermuda based), larger non-insurance exposures that can have volatility, larger equity exposures,

 

That's kinda odd, those attributes are a plus for Berkshire....

[Spekulatius]

16 minutes ago, Luca said:

Well, he said it himself, its not about the fundamentals but past mistakes and "complexity". I would have expected their analysis was based on fundamentals haha! 

Complexity is an issue that reduces valuations in general. A simple business will be valued higher than a complex business, all else being equal.

 

What @SafetyinNumbers call social numbers is what Aswath Damadoran call’s the story. I think the story is getting better with FFH but as an insurance holding stock, it is unlikely to even become a stock that has much of a story value.

Edited November 10, 2023 by Spekulatius

[glider3834]

30 minutes ago, Viking said:

 

I received a response to my question to RBC regarding why they valued Fairfax at 1 x BV. Copied below is their response. I was impressed they got back to me. 

----------

On Nov 8, 2023, at 6:41 AM:

 

Hi (Viking),

 

Fairfax has never traded with the peers you are citing (most of the time has been below book in recent years).  I think there are a few factors to consider including Fairfax being a more complex business vs. some peers in terms of where they write business, international (not U.S. or Bermuda based), larger non-insurance exposures that can have volatility, larger equity exposures, track record, not trading on major U.S. exchanges, little analyst coverage. I don’t dispute your points but these are a few reasons (those could change over time) – not about the fundamentals of the business right now. Thanks for the email. 

 

Best,

Scott

thanks viking its interesting how price can drive narrative 

 

 

[Viking]

Fairfax has had an amazing run the past 3 years - the stock is up about 200% - so it is hard to argue that the stock is unloved or even under-followed today (maybe i need to update my view on this…). That is an amazing increase.
 

The response from the analyst at RBC highlights just how long it takes for the narrative around a company to change. It takes many years.
 

A good example is Apple. Apple’s stock bottomed in 2013. It took 7 years - right through until 2020 - for the old narrative to be fully exorcised and for the new narrative to become entrenched. And a lot of money was made by patient shareholders. The key for investors in Apple during this period of time was to simply hold their position - to sit on their hands. 

 

That is probably the key lesson here: patience. 
 

As long as the story / fundamentals remain intact, holding though the update in narrative phase (also called multiple expansion) can be extremely profitable for shareholders. 
 

Growing earnings + increasing multiple + lower share count. This was Apple’s secret sauce and over a 9 year period it gave shareholders a 12 bagger.

 

Edited November 11, 2023 by Viking

[StubbleJumper]

1 hour ago, Viking said:

Fairfax has had an amazing run the past 3 years - the stock is up about 200% - so it is hard to argue that the stock is unloved or even under-followed today (maybe i need to update my view on this…). That is an amazing increase.

 

I would suggest that the best thing to do is completely ignore the analysts.  They've rarely demonstrated much of an understanding of FFH.  We know very well that FFH is certain to show strong growth in BV during 2023 and is likely to have a very good year in 2024 (likely 15%+ growth in BV). Short of an implosion in FFH's valuation, we will experience good, or possibly very good returns over the next year or two, irrespective of what some analyst says.

 

But, the analyst has made a bit of a point, which is that there might be limits to growth in valuation.  On this forum, there is understandably a great deal of enthusiasm about FFH and that is sometimes projected long into the future.  The logical conclusion of that enthusiasm is the view that FFH is worth a much larger multiple of EPS or of BV than its current valuation.  When an analyst suggests that FFH is worth ~1x BV, he has his feet anchored firmly in the past.  Every year, in the letter to shareholders, Prem publishes a table depicting the change in BV/sh (page 20 of last year's letter).  If you look at, say, the past 20 years, you are looking at an annualized increase in BV of a bit less than 9%, with a great deal of annual variabilty.  Add the dividend to that growth in BV and we've seen a decent, but unspectacular return.  It is not surprising that an analyst might say that this sort of long-term performance might be worth a valuation of ~1x BV.

 

It is possible that FFH has experienced a fundamental shift and that its future will differ materially from its past 20 years.  Perhaps FFH's goal of 15%+ annual growth of BV will become the rule rather than the exception.  But, you will forgive the analyst and the market more broadly for waiting to see that fundamental change rather than immediately awarding a higher valuation and hoping that it will ultimately be justified by improved long-term operational performance.

 

In the mean time, FFH currently trades at US$900, which is roughly Q3 BV adjusted for the excess of market value over the carrying value of certain positions that are not M2M.  FFH shareholders will likely get a good return over the next couple of years on the basis of strong earnings alone, with no requirement for growth in valuation.  If FFH ends up trading for 1.1x or 1.2x adjusted-BV in 2025, so much the better.  But, the market's skepticism is well earned through 20 years of adequate, but unspectacular returns.

 

 

SJ

[Viking]

4 hours ago, Spekulatius said:

Complexity is an issue that reduces valuations in general. A simple business will be valued higher than a complex business, all else being equal.

 

What @SafetyinNumbers call social numbers is what Aswath Damadoran call’s the story. I think the story is getting better with FFH but as an insurance holding stock, it is unlikely to even become a stock that has much of a story value.

@Spekulatius i think the fundamental problem for Fairfax is there is no consensus among analysts/investors of what the normalized earnings power is for Fairfax today. This in turn makes it impossible to come up with an intrinsic value. 
 

I think normalized earnings for Fairfax is about $150/share. And this should grow nicely in the coming years. 
 

Lots of people on this board think earnings this year at Fairfax are unsustainably high (and my $150 estimate is ‘peak earnings’). Lots of analysts agree - some are forecasting EPS to fall at Fairfax in 2024. Do they think Fairfax is going to destroy capital moving forward (mal-invest record earnings)? 
 

I think the biggest issue with valuing Fairfax today is the historical numbers are grossly understated and full of noise. 2023 is the first year where we are getting an accurate picture of what the different income streams at Fairfax can generate moving forward. It makes sense investors will need to see 2 or perhaps 3 years of growing earnings to ‘believe’ they are real and sustainable.

 

Over time, as more investors come to understand the true earnings power of Fairfax the stock will get valued more appropriately. I suspect the narrative (story) will also continue to improve moving forward.
 

When Fairfax stock is trading at 1.1 x BV, my guess is the analyst at RBC will increase his target to 1.1 or perhaps even 1.2 x BV. And he will have a couple of really good reasons justifying the re-rating…

Edited November 11, 2023 by Viking

[StubbleJumper]

11 minutes ago, Viking said:

I think normalized earnings for Fairfax is about $150/share. And this should grow nicely in the coming years. 
 

Lots of people on this board think earnings this year at Fairfax are unsustainably high (and my $150 estimate is ‘peak earnings’). Lots of analysts agree - some are forecasting EPS to fall at Fairfax in 2024. Do they think Fairfax is going to destroy capital moving forward (mal-invest record earnings)? 

 

You might ultimately be right.  Your projection for Dec 2025 BV is roughly US$1200.  What ROE is required to meet your $150/sh normalized EPS in 2026?  Roughly a 12% ROE, right?  It could very well happen if operating conditions don't deteriorate too badly.  Alternatively, it is possible that the hard market will have turned before 2026 and that interest rates on sovereign debt may attenuate by 2026.  Everyone is free to make the assumptions they want, but assuming that strong operating conditions will persist for long periods is something that people do at their own risk and peril.

 

 

SJ

[SafetyinNumbers]

4 hours ago, Spekulatius said:

 

What @SafetyinNumbers call social numbers is what Aswath Damadoran call’s the story. I think the story is getting better with FFH but as an insurance holding stock, it is unlikely to even become a stock that has much of a story value.

I think the price will ultimately drive the narrative which will increase Social Value from a negative to a positive. The price will move as long as Fairfax executes and grows book value 10%+ which I argue is hard not to do given the float to book value ratio. As it becomes a bigger part of the index, active managers will have to buy it and they will need a rationale. The analysts will also need reasons to increase their price target. The narrative will change because the multiple expanded not the other way around.

 

Some investors will argue float is valuable and businesses that generate float are worth more than book value. Others might appreciate how quickly dividends and associates income are growing as Viking pointed out. After some big gains in the equity portfolio some PMs will talk about the cheap exposure to Greece and India. The negatives will become positives. That’s my bet anyway, it’s still a bet as there are no sure things but the probability is high in my opinion. The beauty is at this price, it’s a free option. 
 

The more skeptical current holders are the longer it will take as extant holders determine the selling price. The institutional buyers use VWAP so they are price takers while sellers are price makers. It will be fun to see how it plays out. It’s been a good run for 3 years already as weight in the index has more than doubled from 45bps to ~100bps now. There is no reason for that to stop unless FFH book value growth stalls for a few years. It’s just hard to see how that happens in the next 5 years.

[Munger_Disciple]

1 hour ago, StubbleJumper said:

 

You might ultimately be right.  Your projection for Dec 2025 BV is roughly US$1200.  What ROE is required to meet your $150/sh normalized EPS in 2026?  Roughly a 12% ROE, right?  It could very well happen if operating conditions don't deteriorate too badly.  Alternatively, it is possible that the hard market will have turned before 2026 and that interest rates on sovereign debt may attenuate by 2026.  Everyone is free to make the assumptions they want, but assuming that strong operating conditions will persist for long periods is something that people do at their own risk and peril.

 

 

SJ

 

[MMM20]

16 hours ago, StubbleJumper said:

Everyone is free to make the assumptions they want, but assuming that strong operating conditions will persist for long periods is something that people do at their own risk and peril.

 

Missing the trees for the forest

 

Edited November 11, 2023 by MMM20

[StubbleJumper]

35 minutes ago, MMM20 said:

 

Missing the trees for the forest

 

 

Oh?  You have some compelling explanation about how a 12% ROE might be obtained in 2026 without continued favourable CRs and continued favourable interest rates?  Nobody is assuming that the earnings from 2023 or 2024 will be lit on fire, but you do need to get an ROE from them....

 

I find it instructive to periodically review the table depicting FFH's annualized growth in BV that Prem publishes every year in the annual letter.

 

 

SJ

[MMM20]

22 minutes ago, StubbleJumper said:

 

Oh?  You have some compelling explanation about how a 12% ROE might be obtained in 2026 without continued favourable CRs and continued favourable interest rates?  Nobody is assuming that the earnings from 2023 or 2024 will be lit on fire, but you do need to get an ROE from them....

 

I find it instructive to periodically review the table depicting FFH's annualized growth in BV that Prem publishes every year in the annual letter.

 

 

SJ

I’ll have more to add later but I think things like the pet insurance sale and digit investment are instructive.

[vinod1]

18 hours ago, Viking said:

@Spekulatius i think the fundamental problem for Fairfax is there is no consensus among analysts/investors of what the normalized earnings power is for Fairfax today. This in turn makes it impossible to come up with an intrinsic value. 
 

I think normalized earnings for Fairfax is about $150/share. And this should grow nicely in the coming years. 
 

Lots of people on this board think earnings this year at Fairfax are unsustainably high (and my $150 estimate is ‘peak earnings’). Lots of analysts agree - some are forecasting EPS to fall at Fairfax in 2024. Do they think Fairfax is going to destroy capital moving forward (mal-invest record earnings)? 
 

I think the biggest issue with valuing Fairfax today is the historical numbers are grossly understated and full of noise. 2023 is the first year where we are getting an accurate picture of what the different income streams at Fairfax can generate moving forward. It makes sense investors will need to see 2 or perhaps 3 years of growing earnings to ‘believe’ they are real and sustainable.

 

Over time, as more investors come to understand the true earnings power of Fairfax the stock will get valued more appropriately. I suspect the narrative (story) will also continue to improve moving forward.
 

When Fairfax stock is trading at 1.1 x BV, my guess is the analyst at RBC will increase his target to 1.1 or perhaps even 1.2 x BV. And he will have a couple of really good reasons justifying the re-rating…

 

If normalized earnings for Fairfax this year are $150 per share. Then these earnings must be growing at least at about 5% annually. That means, Fairfax should be able to easily earn $2000 per share in aggregate over the next 10 years. You cannot exclude any "one time" losses, this would be all in.

 

That would be the definition of what normalized earnings would mean.

 

Personally, I would be thrilled if this happens, but I think this is unlikely. 

[Viking]

1 hour ago, StubbleJumper said:

 

Oh?  You have some compelling explanation about how a 12% ROE might be obtained in 2026 without continued favourable CRs and continued favourable interest rates?  Nobody is assuming that the earnings from 2023 or 2024 will be lit on fire, but you do need to get an ROE from them....

 

I find it instructive to periodically review the table depicting FFH's annualized growth in BV that Prem publishes every year in the annual letter.

 

SJ

@StubbleJumper why do you think

1.) a 95-96CR is not sustainable over the next 5 years? What if Fairfax IS becoming a better underwriter?

2.) interest rates today are ‘favourable’? What if interest rates are simply back to normal?
3.) power of compounding is dead? it also appears you think Fairfax (and its equity holdings) will not invest record earnings well moving forward… $3.5 billion per year in earnings is a big number… it could deliver $350 million ($15/share) in incremental earnings to Fairfax each year if it is invested wisely. 2023 + 2024 + 2025 - year after year etc. You appear to be completely discounting the power of compounding looking forward…

• Yes, the hard market will end at some point. Yes that will slow top line organic growth. But why does that mean CR has to immediately increase to 100 or higher? 
• Yes, interest rates have increased from when they were zero. Why do we think they will be going back there? 

People are anchored to the financial regime from 2008-2021. What if the next 10 years is different? 
 

Maybe we ARE in a structurally higher inflation environment. Which suggests we are also in a higher interest rate environment. Cost of capital matters again. Active management matters again. Since 2018, Fairfax has excelled with active management. Why do we think they are all of a sudden going to get stupid?

 

Do i know how the future is going to unfold for Fairfax? No, of course not. I see a range of outcomes - some good and some bad. With a ‘baseline’ forecast i try and find the middle ground in the forecast. Some items will be too high; some will be too low. 
 

I also try to work with facts as much as possible. Do i know how the insurance cycle is going to work out? Ot the economy? Or interest rates? Macro? I have no idea. So why would i assume it all turns against Fairfax? My guess is there will be both puts and takes. 
 

What i see on the board is lots of pessimism. But no balance. No discussion of what might go better than expected. So i view people on the board as being too bearish in their outlook for Fairfax’s earnings moving forward. 

 

i don’t equate bearish with being conservative. Conservative would include a more balanced discussion of positives and negatives. 
 

I enjoyed listening to Howard Marks most recent memo: Further Thoughts on Sea Change 
 

- https://www.oaktreecapital.com/insights/memo/further-thoughts-on-sea-change

—————

PS: look at Eurobank. Look at the turnaround at this company the past 5 years. Look at what it is earning today (a record amount) and what it is doing with those earnings (purchase of Hellenic Bank). My guess is EPS will increase 20% in 2024. They likely will be instituting a dividend in 2024 and payments to Fairfax could be $80-$90 million. This will increase total dividends received by Fairfax by 50%. It is meaningful. Not built into my $150 ‘normalized’ number.

 

Digit? Do people think we are done with this investment? My guess is it is likely to deliver significant incremental value to Fairfax shareholders moving forward. 
 

GIG is a great real time example. This purchase will increase top line. And float. And investments. Fairfax is done after the GIG acquisition? Because we don’t know with certainty what they are going to do we assume they are going to do nothing?
 

These are just three quick examples. Fairfax has so many levers to pull to drive value for shareholders moving forward with insurance and investments. My guess is they are going to continue to execute well. But i remain open minded. 

Edited November 11, 2023 by Viking

[SafetyinNumbers]

1 hour ago, vinod1 said:

 

If normalized earnings for Fairfax this year are $150 per share. Then these earnings must be growing at least at about 5% annually. That means, Fairfax should be able to easily earn $2000 per share in aggregate over the next 10 years. You cannot exclude any "one time" losses, this would be all in.

 

That would be the definition of what normalized earnings would mean.

 

Personally, I would be thrilled if this happens, but I think this is unlikely. 

I did the math and it’s just under $2000/sh after accounting for the dividend unless I screwed it up.

 

@vinod1 where would you set the odds on book value being > $2777 (current BV + 2000 - dividends) in exactly 10 years and where would you set the over/under on BV in 10 years?