Fairfax 2024

[Haryana]

On 1/16/2024 at 4:17 PM, Parsad said:

 

I thought he was already in there!  This is long overdue.  Congratulations Prem!  Cheers!

 

Not yet in there still, actually.

 

"The 45th Class of Companions will be inducted into the Canadian Business Hall of Fame on May 23, 2024 at the Metro Toronto Convention Centre."  (15 years after Michael Lazaridis and James Balsillie).

https://cbhf.ca/

 

Edited January 18 by Haryana

[SafetyinNumbers]

On 1/17/2024 at 7:09 AM, nwoodman said:

Hardly an original thought but while the TRS position remains open at a carrying cost of Libor + spread they are expecting something north of book value as a multiple. 

I don’t think it’s necessary to get multiple expansion to justify keeping the TRS on given BV growth + dividend is well north of the cost of keeping the position on but the optionality is pretty great.

[nwoodman]

4 hours ago, SafetyinNumbers said:

I don’t think it’s necessary to get multiple expansion to justify keeping the TRS on given BV growth + dividend is well north of the cost of keeping the position on but the optionality is pretty great.

I don’t disagree.  However,  I believe there is a share price that they would unwind the position today  (IV).  The fact that they haven’t (AFAIK)  means we aren’t there yet.

 

It is quite a unique situation.  When they do eventually unwind the position it should create some short term downward selling both from physical availability of shares and sentiment.  
 

A problem for a much higher share price.

[SafetyinNumbers]

3 hours ago, nwoodman said:

I don’t disagree.  However,  I believe there is a share price that they would unwind the position today  (IV).  The fact that they haven’t (AFAIK)  means we aren’t there yet.

 

It is quite a unique situation.  When they do eventually unwind the position it should create some short term downward selling both from physical availability of shares and sentiment.  
 

A problem for a much higher share price.

it would be interesting if they found a single buyer for it like a pension plan or endowment fund. That could be structured very creatively too. 

[SafetyinNumbers]

I set up a poll. Please vote!

 

 

[cwericb]

New high ($1302) this morning and high volume (nearly 200,000 shares traded). So far.

[gfp]

12 minutes ago, cwericb said:

New high ($1302) this morning and high volume (nearly 200,000 shares traded). So far.

 

The opening trade was 185,000 shares

[Daphne]

Something is being unwound this month

[gfp]

The same kind of volume spikes happened last January - I assume it has something to do with the timing of the dividend, the counterparties to the TRS and the calendar year.

[Parsad]

33 minutes ago, gfp said:

The same kind of volume spikes happened last January - I assume it has something to do with the timing of the dividend, the counterparties to the TRS and the calendar year.

 

+1!  Cheers!

[gfp]

There also seems to be an effect from the good earnings out of Travelers this morning

 

https://s26.q4cdn.com/410417801/files/doc_financials/2023/q4/4Q23-Press-Release-FINAL.pdf

 

https://s26.q4cdn.com/410417801/files/doc_financials/2023/q4/4Q23-Webcast-FINAL.pdf

[MMM20]

 

So who just got the bargain of the day?

[LC]

Not me but I did put in some low limit orders just in case someone wants to make repeat sales

[gfp]

19 minutes ago, MMM20 said:

 

So who just got the bargain of the day?

I don't think that really happened.  What is your data source?

[Dinar]

I do not think that is correct.  Bloomberg shows 923.08 low but no trades below 940.   Lowest trade it shows is 945.4043

[gfp]

Yeah, the low for the day was $945.15 on FRFHF - first thing in the morning.  The above chart is just bad data.

[MMM20]

3 hours ago, gfp said:

I don't think that really happened.  What is your data source?

Weird. From Koyfin. 

[Viking]

Fairfax: The Big Fish that Got Away?

 

“The stock market is there to serve you and not to instruct you.” Warren Buffett

 

Investors have lots of regrets. Missed opportunities. Not buying a stock that afterwards turns into a big winner. Or selling a winning position way too early. ‘The big fish that got away’ kind of story.

 

In 2021, Fairfax’s shares returned 44%. An investor looking at Fairfax in early 2022 might have concluded ‘dang, missed that one!’ and not invested.

 

In 2022, Fairfax’s shares returned 21%. Most stocks got crushed in the bear market of 2022, so Fairfax’s performance compared to the averages was exceptional. That same investor, looking at Fairfax in early 2023, might have come to the same conclusion: ‘dang, missed that one! For the second year in a row!’ and not invested again. The fish story just got bigger.

 

Well, here we are now in early 2024. How did Fairfax's stock do in 2023? It was up another 55%. Over the past three years shares are up 170%. Investors who did not buy shares (or sold their position too early) over the past three years are left asking themselves what happened? How did they miss out? And what should they do now? The fish story is turning into a whopper of a tale.

 

Three weeks into 2024 the stock is up another 5%. This puts the total increase at 184% since Dec 31, 2020, making it almost a two-bagger in Peter Lynch’s parlance. Fairfax, the ‘big fish,’ continues to taunt investors.

 

 

What is the lesson to be learned?

 

By itself, the increase in Fairfax’s share price of 184% since Dec 31, 2020, tells you little (nothing?) about Fairfax’s valuation today. This is because price (if used by itself) is a terrible valuation tool. Over the past three years, 'investors' who used price as their primary valuation tool for Fairfax have been led astray. 

 

As Buffett teaches us, a stock price exists to serve investors, not instruct them.

 

Let’s take the discussion in a slightly different direction to see what we can learn.

 

What happens if we increase the timeframe?

 

Let’s humour ourselves and play the price game for a little longer. But this time with a couple of added twists. Let’s zoom out - instead of looking at Fairfax’s share price for the past three years, let’s look at the share price for the past 9 years. And let’s include operating earnings - let’s make our analysis a little more robust.

 

From 2015 to 2019 (right before Covid hit), Fairfax’s share price traded in a pretty tight band around US$500. About 50% of the time Fairfax’s share price was over $500 and the other 50% of the time it was under $500. So for 5 years straight investors felt Fairfax was worth about US$500/share. 

 

 

Over this 5-year span, operating earnings at Fairfax averaged about $1.07 billion per year. So from 2015-2019, investors felt $1.07 billion in operating earnings warranted a Fairfax share price of about US$500.

 

Let’s now compare this historical period to today to see what we can learn.

 

Let’s start with the share price. Fairfax’s share price closed today at about US$970/share. The stock is up 94% from the average of about $500/share from 2015-2019.

 

Let’s now look at operating earnings. Operating earnings are forecasted to come in at about $4.4 billion for 2023. That is an increase of 305% from the average of $1.07 billion from 2015-2019. My current estimate is for operating earnings to increase in 2024 to about $4.6 billion. Because the share count has come down meaningfully in recent years, this would put operating earnings per share over $200/share in 2024. This is 359% more than the average from 2015-2019 (about $44/share). Importantly, the increase in operating earnings is durable (the average duration of the fixed income portfolio was increased to 3.1 years in October 2023, which locks in interest income for the next couple ofyears, the largest component of operating income).

 

 

Let’s put the two together.

 

Fairfax’s stock is up about 90% over the past 9 years. And operating earnings per share - the high quality stuff - is forecasted to be up 359% (over the trend from 2015-2019). High quality earnings have exploded and the stock price has increased modestly.

 

Valuation: Buffet teaches us that a stock is worth the present value of the cash flows (things like operating earnings) that are expected to be generated in the future.

 

Conclusion

 

Looking at Fairfax’s share price and using a 3-year time horizon it is easy to conclude the stock must be crazy expensive today. Looking at Fairfax’s share price and using a 9-year time horizon (and including operating earnings) it is easy to conclude the stock must be crazy cheap today. How can it be both crazy cheap and crazy expensive at the same time? The answer, of course, is that it can’t be both.

 

Let’s circle back to my original comment - using the share price, on its own, as your primary tool to value Fairfax is pretty dumb.

 

As we begin 2024, that big fish (called Fairfax) is once again staring investors right in the face. And guess what? It’s probably going to slip away from them yet again. And in another couple of years, they will think back to today and likely kick themselves. And the story of ‘the big fish that got away’ will get even bigger.

 

—————

 

How do the traditional valuation metrics look today?

 

Fairfax’s stock has a PE of 5.9 (to Yahoo Finance’s estimate of 2023 earnings). The ROE for 2023 is tracking to be a little over 20%, which is very good. Price to book value (P/BV) is 1.11, which is very low - and this could come down to around 1.05 when Fairfax reports Q4 results in a few weeks.

 

Expensive? Really?

 

 

—————

 

What happened in recent years to spike operating earnings so much at Fairfax?

 

Lots of things. Below is one of them. Fairfax is a P/C insurance company. Net premiums written have grown from $6.1 billion in 2014 to an estimated $26.4 billion in 2024 (my current estimate), an increase of 331% over 10 years.

 

Now over-lay this exceptional growth over 10-straight years with the much more modest increase seen in Fairfax’s stock price over the same time frame.

 

Things that make you go hymmm…

 

 

Edited January 21 by Viking

[Dinar]

@Viking, why do you think underwriting and reinsurance profits will be done in 2024 from 2023?  Thank you.

[Viking]

11 hours ago, Dinar said:

@Viking, why do you think underwriting and reinsurance profits will be done in 2024 from 2023?  Thank you.

@Dinar My estimate for underwriting profit for 2024 is a little lower than 2023 because of my assumptions with the combined ratio (CR). 2023 has been a low cat year (big ones) so i am forecasting a full-year CR of 94%. For 2024, i am using 95% as my CR estimate as i expect ‘big catastrophes’ to normalize (come in higher than this year). I think that is a reasonable assumption. 
 

Of course, one of these years, we are going to get a really bad year for catastrophes. 
 

There is also a chance we could learn that Fairfax is a better underwriter than previously thought. I think they have been slowly improving the quality of their insurance operations - most recently Brit and reducing its catastrophe exposure. If true, this suggests my CR assumption might prove to be too conservative. 
 

We will see. 
 

PS: if you go to the 'Premiums' tab in my Excel spreadsheet (attached) you can see the build. You can adjust the CR (or any estimate) as you like to make the estimate your own.

Fairfax Jan 10 2024.xlsx

Edited January 21 by Viking

[LC]

Viking- appreciate your ongoing analysis.  
 

While implying FFH may be still cheap as the share price appreciation (+~100%) has not kept up with op. Income growth (+~330%), i think to really come to that conclusion you have to break out the components of op Inc. and assess the growth and durability of each. 
 

For example performance on the fixed income portfolio are dependent on interest rates. It may be difficult to project that component. 
 

Point is I do not think share price vs op income is a 1:1 relationship, although I personally tend to agree it should be closer than 3.3:1!

 

 

[Viking]

11 hours ago, LC said:

Viking- appreciate your ongoing analysis.  
 

While implying FFH may be still cheap as the share price appreciation (+~100%) has not kept up with op. Income growth (+~330%), i think to really come to that conclusion you have to break out the components of op Inc. and assess the growth and durability of each. 
 

For example performance on the fixed income portfolio are dependent on interest rates. It may be difficult to project that component. 
 

Point is I do not think share price vs op income is a 1:1 relationship, although I personally tend to agree it should be closer than 3.3:1!

@LC great point. To come up with a ‘fair value’ for Fairfax shares, i think it is helpful to use a number of different methods. And of course, ‘fair value’ is going to be a range. My previous post was done kind of tongue in cheek and not meant to be rigorous. One of my big mistakes in the past was using price as my primary tool when exiting a position (that sucker went up a lot so it is time to sell). That (flawed) logic lead me to sell my big Apple stake in 2015/16 (after a big gain) Sometimes when i write my posts i am talking to myself… 

As an investor I think it is very easy to get anchored in the past. I think many people are anchored in the past when they value Fairfax. Part of the problem is Fairfax is a turnaround… it was under-earning for almost a decade. So its past results are not a good input for investors to use today to value the company looking forward (although the past 2 years are much better). Getting anchored on faulty numbers is even worse.

 

A question. I think with the following comment you were thinking interest rates might come down. Am i correct?

 

“For example performance on the fixed income portfolio are dependent on interest rates. It may be difficult to project that component.” 
 

Do you see lower interest rates as a risk? Because they were lower in the past?
 

What about higher interest rates? Would that then be opportunity for Fairfax? 
 

I find when investors look at Fairfax it is not done in a balanced way. Only one scenario is considered (usually anchored by past events) and it usually leads to lower earnings. The other scenario, which might be just as likely and would lead to higher earnings, is not considered. It is presented as being conservative but i don’t see it that way. 
 

Both risk and opportunities need to be equally considered when valuing a company. Probabilities then need to be assigned to each. And then folded into a valuation framework.

 

- what is the probability rates move lower in the coming years?

- what is the probability rates move higher in the coming years?

Based on what i know today, my current assessment is the risks are probably petty balanced. At least close enough. (Yes, trying to predicting macro is pretty much impossible… but that is a topic for another day).

 

Fairfax business results are in uncharted territory. They have been for the past three years. But investors keep expecting a return to the mean (lower historical numbers).
 

I am not oblivious to the risks. But i am also not ignoring the opportunities. I am trying to find the middle ground (i think). 
 

What we are slowly learning is a great deal of intrinsic value had been building at Fairfax over the past 10 years. Until recently, it remained hidden (from earnings). But that is changing. It will likely take another couple of years for the true earnings power of the company to become clear to investors (including me).

Edited January 21 by Viking

[LC]

59 minutes ago, Viking said:

A question. I think with the following comment you were thinking interest rates might come down. Am i correct?

Yes - but that’s just part of the picture (which you have done a really great job illustrating to this entire board).

 

Rates going down would of course present reinvestment risk for FFHs large fixed income portfolio. And similarly on the flip side, rate increases provide an opportunity.
 

And it’s important to note management has done a great job taking advantage of 2023’s rise in rates. 
 

But what will falling rates do to the rest of the income streams? I’d imagine the equity portfolio would rise. And low rates would be a barrier to entry in the insurance market. 
 

At the end of the day whether I think rates will rise or drop (I don’t have a strong opinion but I lean towards ‘higher for longer’), I think it presents opportunities to Fairfax either way. And management has done a good job these past few years on the big decisions (I have a more mixed opinion of them on the smaller deals eg blackberry, KW, etc).

[Dinar]

There is another way to look at this.  Let's look at the price to book multiples of other reinsurers - Everest, RNR, et all.  I think that they are trading at a price / book = 1.45 for Everest, 1.57 for RNR, so clearly markets expect good times to last.  I have not by the way checked if it is accurate book, in other words were bonds marked to market? If we mark Fairfax's investments to market - airport, etc..., then price to book is 0.9, may be 0.8?   So clearly cheap vs the rest of the reinsurance space?

[valuesource]

On 1/4/2024 at 7:10 AM, juniorr said:

you might...best to ask them to journal the stock over to usd side so you avoid the 2.5 fee

In the case of dividends in excess of $1mm my broker dealer will charge 5bps on the exchange (0.0005).  In the case of small dividends (lets say $100) most brokers will go 1.0-1.2%.  You should receive a discount on larger size.  My dealer will consider everyone who owns stock on their books.  It bears mentioning that I do not deal with a bank.  Mine is Research Capital, 199 Bay St in Toronto.