Fairfax - 2024/25 risks

[This2ShallPass]

Yesterday, I was taking a long walk reflecting on my investing performance. 2023 was a very good year, as I would assume the case for many here who have a large Fairfax position. The next two years also look to be really good, @Viking has covered it in depth. The upside is compelling and maybe even simple with rates locked in for 3 years. I do believe Prem will follow through on his Teledyne comments, the hard market is slowing and with money flowing in we'll see significant buybacks. Many other tailwinds like Digit IPO waiting in the wings. 

 

All the rosiness though made me a little uncomfortable (the market humbles you when you're least expecting it:)). What could go wrong w Fairfax? Starting this topic (hopefully it's not redundant) to focus on the risks and having a clear understanding so we're not surprised. 

 

The big unknown for me is underwriting quality. With premiums rising so fast, how do we know they haven't relaxed their standards. CRs worsening is a lagging indicator, the whole world will know when that happens. Are there other metrics that we can track and regularly review over the next couple of years? Maybe the insurance experts can weigh in.

 

Pls add other risks that we should keep an eye on.

 

Wish you all a happy new year and a great investing 2024!

[Viking]

@This2ShallPass, I have a question. Can you explain what you mean by “wrong” when you say: “What could go wrong w Fairfax?”

 

I look at risks as kind of being across three dimensions:

1.) time - short term (next two years) and longer term (3 and more years)

2.) internal - under Fairfax’s control

3.) external - not under Fairfax’s control

 

Some events could be short term negative for the company’s stock price and be good for the company longer term (looking out a few years). For example, the dramatic fall in Fairfax’s stock price in 2020/2021 (outside of managements control?) ended up being a gift for long term shareholders (it allowed management to put on the FFH-TRS position - 1.96 million shares at $373/share - and buy back 2 million shares at $500/share). 
—————

The biggest near term risk to the stock price that i see is skittishness of Fairfax investors. The wounds inflicted by the past have not yet healed. It will take more time. As a result, at the first sign of trouble (real or not), we could see investors panic and Fairfax shares could get hit hard. Just another buying opportunity? Probably. But it will depend on what the trigger is.

 

IFRS 17 accounting is a near term risk for me (for reported earnings). It is new and i do not understand how it impacts Fairfax’s quarterly results (i don’t yet have a feel for its overall impact to results). Interest rates in Q4 have moved dramatically further out on the curve. What will the IFRS 17 impact be? I am not sure, other than i expect it to be a headwind to earnings.

Do losses from runoff accelerate? Losses have been running around $200 million for a few years now. Do they accelerate (inflation)? Or not? This is becoming a smaller part of Fairfax (helps when your insurance business grows like stink over a decade).
 

Reserving in general is a watch out, not just for Fairfax, but for the industry.

 

Another risk: lower interest rates + end of hard market could result in investors aggressively selling off P/C insurance stocks and rotating into other sectors. I think this has been happening a little over the past month or so. This is more of a P/C insurance risk than a Fairfax specific risk. 
 

Sorry, i am rambling…

Edited January 1 by Viking

[This2ShallPass]

2 hours ago, Viking said:

I have a question. Can you explain what you mean by “wrong” when you say: “What could go wrong w Fairfax?”

 

I look at risks as kind of being across three dimensions:

1.) time - short term (next two years) and longer term (3 and more years)

2.) internal - under Fairfax’s control

3.) external - not under Fairfax’s control

Viking, my focus for this topic was on #2, things under Fairfax control. Issues at P&C industry level or macro driven need to be weathered or may even be buying opportunities as you mention.

 

Losses from runoff is an example of things to discuss more. If losses are accelerating, why and are there some underlying factors.

 

To be clear, I'm not saying there are any issues. I'm pretty bullish. Just want have a thread that focused only on the potential areas of concern (rather than being part of the other larger discussions where they might not get the same level of attention).

 

[Luke]

The most worrying risk would be a multi billion loss due to a once in a century hurricane/earthquake. So huge catastrophe losses that will kill returns for multiple years or even lead to some selling of assets to recover. Although unlikely, we never know by how much climate change will fuck things up or maybe just not. Its a swan risk one has to live with in insurance unfortunately

Edited January 3 by Luca

[Luke]

BUT there would be a very strong hard market after it too and the cashflow that comes in is still significant, so from today's position even that seems to be not AS bad as it would have been some time ago IMO

[This2ShallPass]

10 hours ago, Luca said:

Although unlikely, we never know by how much climate change will fuck things up or maybe just not. Its a swan risk one has to live with in insurance unfortunately

Agreed, that's one we will have to live with investing in insurance. One thing I have done this past year and plan to do next 2 hurricane seasons is buy long puts on a basket of insurance companies.

 

It cost ~2%/yr, only doing this as Fairfax is a big % of my pf and paying the put premium seems prudent..

 

[Hamburg Investor]

Prem or other important managers at Fairfax could retire/get hit by a bus, get ill out of a sudden. I guess Prem today is more important than Warren is for Berkshire. And there’s no rule that Prem or Gayner have to work as long as Buffett, stay healthy etc.
 

Does anybody have an idea, who would lead Fairfax, if Prem would leave tomorrow? 

[SafetyinNumbers]

2 hours ago, Hamburg Investor said:

Prem or other important managers at Fairfax could retire/get hit by a bus, get ill out of a sudden. I guess Prem today is more important than Warren is for Berkshire. And there’s no rule that Prem or Gayner have to work as long as Buffett, stay healthy etc.
 

Does anybody have an idea, who would lead Fairfax, if Prem would leave tomorrow? 

I think his son, Ben, would become Chairman. Not sure about CEO. Maybe Peter Clarke?

[Haryana]

mentioned at the end of this interview that succession plan is with the board and with the family.

 

https://youtu.be/BW08lI8518A

 

Edited January 5 by Haryana

[Phoenix01]

On 1/4/2024 at 4:02 AM, This2ShallPass said:

Agreed, that's one we will have to live with investing in insurance. One thing I have done this past year and plan to do next 2 hurricane seasons is buy long puts on a basket of insurance companies.

 

It cost ~2%/yr, only doing this as Fairfax is a big % of my pf and paying the put premium seems prudent..

 

That is a great way to keep the substantial upside of FFH and protect against the temporary market fluctuations.  Are there any insurance companies that are better candidates to go short?

[Hamburg Investor]

20 hours ago, SafetyinNumbers said:

I think his son, Ben, would become Chairman. Not sure about CEO. Maybe Peter Clarke?

Do you think, they are able to lead Fairfax into a bright future?

[SafetyinNumbers]

3 hours ago, Hamburg Investor said:

Do you think, they are able to lead Fairfax into a bright future?

 

Impossible for me to say but it's not something I worry about. 

[This2ShallPass]

10 hours ago, Phoenix01 said:

Are there any insurance companies that are better candidates to go short?

Good question. I'm sure there are some companies that are perennial underperformers and are a good bet to perform even worse in a large cat event. I don't know them, maybe some of the folks who have more expertise in the insurance sector can chime in..

[Hamburg Investor]

13 hours ago, SafetyinNumbers said:

 

Impossible for me to say but it's not something I worry about. 

Thank you!

[Hamburg Investor]

On 1/5/2024 at 4:08 AM, Haryana said:

mentioned at the end of this interview that succession plan is with the board and with the family.

 

https://youtu.be/BW08lI8518A

 

Thank you!

 

In a way it‘s fascinating: Prem is 73 years old and I get the feeling, everyone (including me) not thinking so much about succession. Maybe we all have a „Buffett-Munger-Bias“?! As if there‘s a rule, that Prem, Gayner and the likes will all work until the 90ies (or even longer), as this has happened at Berkshire. 

 

Anyway I don‘t have the feeling, that succession at Fairfax or Markel is easier to do than at Berkshire, if all three would step back or get hit by a bus tomorrow.
 

Of course the odds are in favour of Fairfax and Markel, that their CEOs might stay longer. Anyway if it happend, I think it would be harder for Fairfax and Markel. Berkshire is just so big and a lot of value creation lies in the big companies it owns etc. and nobody expects that high returns for incremental earnings like at Fairfax and Markel. So the downside would be bigger for Fairfax or Markel, if it happened tomorrow, while it’s less likely to happen, at least in my eyes. And while I have a relatively clear picture for Berkhire, I don’t have that for Prem. I just wish, all to stay healthy for the very longterm…

[dealraker]

On 1/1/2024 at 6:26 PM, Viking said:

@This2ShallPass, I have a question. Can you explain what you mean by “wrong” when you say: “What could go wrong w Fairfax?”

 

I look at risks as kind of being across three dimensions:

1.) time - short term (next two years) and longer term (3 and more years)

2.) internal - under Fairfax’s control

3.) external - not under Fairfax’s control

 

Some events could be short term negative for the company’s stock price and be good for the company longer term (looking out a few years). For example, the dramatic fall in Fairfax’s stock price in 2020/2021 (outside of managements control?) ended up being a gift for long term shareholders (it allowed management to put on the FFH-TRS position - 1.96 million shares at $373/share - and buy back 2 million shares at $500/share). 
—————

The biggest near term risk to the stock price that i see is skittishness of Fairfax investors. The wounds inflicted by the past have not yet healed. It will take more time. As a result, at the first sign of trouble (real or not), we could see investors panic and Fairfax shares could get hit hard. Just another buying opportunity? Probably. But it will depend on what the trigger is.

 

IFRS 17 accounting is a near term risk for me (for reported earnings). It is new and i do not understand how it impacts Fairfax’s quarterly results (i don’t yet have a feel for its overall impact to results). Interest rates in Q4 have moved dramatically further out on the curve. What will the IFRS 17 impact be? I am not sure, other than i expect it to be a headwind to earnings.

Do losses from runoff accelerate? Losses have been running around $200 million for a few years now. Do they accelerate (inflation)? Or not? This is becoming a smaller part of Fairfax (helps when your insurance business grows like stink over a decade).
 

Reserving in general is a watch out, not just for Fairfax, but for the industry.

 

Another risk: lower interest rates + end of hard market could result in investors aggressively selling off P/C insurance stocks and rotating into other sectors. I think this has been happening a little over the past month or so. This is more of a P/C insurance risk than a Fairfax specific risk. 
 

Sorry, i am rambling…

Let me re-write this:

 

Populism is a threat in my view.  Can already written contracts be altered by a president (one past pres did mention this) seeking support?

 

Many of the brokers have their views on this and are constantly publishing on the subject of political, populist, and isolationist movements throughout the world.  In the early 2000's Elliott Spitzer, Mr. lawbreaker himself, was one of the most popular people in the US for several years because he attacked the insurance brokers with a vengeance over contingency commissions.  

 

 

Edited January 6 by dealraker

[This2ShallPass]

1 hour ago, Hamburg Investor said:

In a way it‘s fascinating: Prem is 73 years old and I get the feeling, everyone (including me) not thinking so much about succession. Maybe we all have a „Buffett-Munger-Bias“?! As if there‘s a rule, that Prem, Gayner and the likes will all work until the 90ies (or even longer), as this has happened at Berkshire. 

You're right, this is a real risk and we're all ignoring it. Maybe Buffett clouds our views on longevity:) But this is a risk that we just have to deal with, not sure you can do anything about it.

 

On succession, Prem's kids don't have the expertise and won't be a good fit to lead such a large and complex company in any meaningful way (even as chairman).

[SafetyinNumbers]

36 minutes ago, This2ShallPass said:

You're right, this is a real risk and we're all ignoring it. Maybe Buffett clouds our views on longevity:) But this is a risk that we just have to deal with, not sure you can do anything about it.

 

On succession, Prem's kids don't have the expertise and won't be a good fit to lead such a large and complex company in any meaningful way (even as chairman).

Do you know Ben and thus have an informed opinion?

 

I don’t know him personally but he seems like a very competent, thoughtful investor and he literally grew up in the culture. I’m not sure there is anyone more qualified to be Chairman after Prem.

[This2ShallPass]

8 hours ago, SafetyinNumbers said:

Do you know Ben and thus have an informed opinion?

He did not work his way up the ranks of Fairfax or do anything of significance that's needed to be in BoD of a large company. His last name is the only reason for his position.

 

If you think there's no one more qualified than him, that's high praise and good to hear. I haven't spent a lot of time looking into this so definitely open to changing my opinion on Ben. Why do you feel he's very competent and thoughtful investor? How are the returns of Marvel capital and when he was portfolio manager before? 

[nwoodman]

23 minutes ago, This2ShallPass said:

He did not work his way up the ranks of Fairfax or do anything of significance that's needed to be in BoD of a large company. His last name is the only reason for his position.

 

If you think there's no one more qualified than him, that's high praise and good to hear. I haven't spent a lot of time looking into this so definitely open to changing my opinion on Ben. Why do you feel he's very competent and thoughtful investor? How are the returns of Marvel capital and when he was portfolio manager before? 

The way I don't lose too much sleep over the potential appointment is to think about Ben more along the lines of Howard Buffett's future chairmanship of Berkshire.    I will say that listening to Ben's recent interviews etc, he seems to be pretty sharp. 

 

It wasn't that long ago that Prem was going to start giving the CCs a miss and leaving it up to the other execs, and there are some talented folks in that mix.  Perhaps we will see Prem consider pulling back a little now that the share price has recovered somewhat.  He is certainly a lot quieter in terms of media at the moment, it wasn't that long ago it was "Prem Everywhere".  

 

There is zero value in hauling it over the coals, but it sure is a different Fairfax post Paul Rivett, too.

 

[glider3834]

1 hour ago, This2ShallPass said:

He did not work his way up the ranks of Fairfax or do anything of significance that's needed to be in BoD of a large company. His last name is the only reason for his position.

 

If you think there's no one more qualified than him, that's high praise and good to hear. I haven't spent a lot of time looking into this so definitely open to changing my opinion on Ben. Why do you feel he's very competent and thoughtful investor? How are the returns of Marvel capital and when he was portfolio manager before? 

re your questions - might find useful this interview with Ben Watsa 

https://vimeo.com/862872315

 

 

 

Edited January 7 by glider3834

[SafetyinNumbers]

7 hours ago, glider3834 said:

re your questions - might find useful this interview with Ben Watsa 

https://vimeo.com/862872315

 

 

 

There are two more interviews here worth listening to as well:

 

https://www.marvalcapital.com/interviews

 

Francis Chou also brought Ben by the Ben Graham Dinner last year and gave us a chance to ask questions. I liked his answers. 
 

 

[[email protected]]

On 1/6/2024 at 10:53 PM, This2ShallPass said:

He did not work his way up the ranks of Fairfax or do anything of significance that's needed to be in BoD of a large company. His last name is the only reason for his position.

 

If you think there's no one more qualified than him, that's high praise and good to hear. I haven't spent a lot of time looking into this so definitely open to changing my opinion on Ben. Why do you feel he's very competent and thoughtful investor? How are the returns of Marvel capital and when he was portfolio manager before? 

https://www.investingthetempletonway.com/rising-star-ben-watsas-views-on-india-fairfax-beyond/

I recall he mentioned some performance numbers in this podcast for his India fund. I believe it did really well. 50+% return one year etc. I found a copy of the performance of his small and mid cap fund between 2020 to Feb 21 2023. 

2022+-+Dec+31+-+MFF+-+Annual+Review+-+Final.pdf

Edited March 9 by [email protected]