Fairfax 2024

[SafetyinNumbers]

16 minutes ago, Phoenix01 said:

He is an analyst for RBC that covers Fairfax.  He has been fairly conservative with his valuations in the past.

He retired last year. 
 

I think it’s silly he thinks FFH traded at a discount because the market figured it out. I believe it has more to do with quant preferences. It doesn’t help if analysts like him think the market is efficient so keep their estimates unrealistically low as it just creates a feedback loop. Of course, it doesn’t matter in the long run. 

[Viking]

13 hours ago, Cigarbutt said:

That's a point that needs to be underlined.

-Short version

FFH's underwriting has improved and this improvement can be seen in reported numbers and more can be inferred to support the conclusion that future underwriting results are likely to surprise, positively, overall, over the next 5 years.

-Longer version

This has been discussed before (a few years back in these pages and with you at times...). Here are two pictures. The first is the reserve cycle which is tied to the underwriting cycle.

This is a longer term graph which includes US P/C (relative proxy for world P/C) and which shows how reported combined ratios eventually benefit from reserve releases a few years after a hard market has started and how the opposite occurs after a soft market. Opinion: for FFH with their insured lines profile, their comparable industry follows more the yellow bars, bars which should be compared to FFH's actual results (see below).

Here's another with 2022 results (from NIAC, US P/C):

So more of the same and a significant adjustment needs to be made for workers comp which, at the industry level, has seen a very unusual and high rate of reserve redundancy for a few years including more than 6.6B for 2022, thereby indicating otherwise a recent net adverse development pattern. Note: FFH writes WC policies but the proportion is much less than at the overall P/C level. If avid for details, one can go through their IFRS and otherwise appropriate disclosures and dissect the reserve development pattern at Zenith. Spoiler alert: this additional work does not materially change the conclusions from this post.

Here's from FFH:

The first column is reported directly and represents the CR % points of reserve redundancy at operating subs. The second column requires some basic math and includes the run-off earned premiums and reserve development there also. Several aspects stand out but the main point is that FFH's pattern of reserve releases has been more or less parallel to the industry but better (few % points overall), is likely to improve over the next few years as the market turned around 2018-9 as more recent positive float reserve development will more than compensate older negative float reserve development. The big bonus though (and possibly underestimated and presently unrecognized?) is the fact that FFH grew their premiums very opportunistically, compared to peers. This means that the expected reserve releases over the next few years are likely to surprise to the upside and it's helpful to remember that, for a company writing at a ratio of premiums to equity near one, each one % point of improvement in the reported combined ratio, which includes the accident year combined ratio (which is expected to be reported at slightly to moderately below 100, on a net basis, over the next five years) and the reserve development CR %, corresponds to a pre-tax one % point of improvement in ROE.

 

Technical stuff related to the above Excel table:

-the 2023 result in the second column is likely correct or close to correct but this needs to be checked with the release of the annual report

-in Q4 2023, 0.7% of CR was released at operating subs, for a total of 1.4% for the year, perhaps putting some weight to the hypothesis that the trend for gradually higher reserve releases may have started to turn to the upside for the quarters to come...

@Cigarbutt thanks for your post. I am not an insurance analysts so i really appreciate the detail you provided in your post. Rather, i am a generalist and i develop a thesis (perspective) based on what i learn over time. And than i constantly adjust my thesis as i get new information.
 

I remember when Fairfax was buying up all the international insurers in 2015 and 2016 and thinking ‘old Fairfax’ buying shitty insurance companies… Yes, my ‘thesis’ at the time was completely wrong. 

 

The reality is Fairfax built out their international platform at the perfect time… AIG and others were looking to shed P/C insurance assets. Great strategic move for the company. The fact they were able to do this when they were bleeding money from the equity hedge/short positions is pretty amazing.
 

Fast forward to today and international is delivering a solid underwriting profit and looks poised to possibly be a growth engine in insurance for Fairfax in the coming years.

Edited February 19, 2024 by Viking

[Hoodlum]

With Quess hosting an investor meeting on the 21st to discuss the demerger and the Greek PM visiting India this week along with a business delegation, I wonder if Prem will be in India this week. 
 

https://www.ekathimerini.com/opinion/1232110/greeces-gateway-to-asia-indias-gateway-to-europe/
 

It is also interesting to note that Greece’s most important long-term foreign investor is Indian-Canadian billionaire Prem Watsa, founder and CEO of the Fairfax Financial Holdings. Mr. Watsa often states that “Greece is still by far the best European country to invest in.” With knowledge of both countries, he has been a steady promoter of Greek-Indian business cooperation. 

[glider3834]

https://www.theinsurer.com/viewpoint/embracing-2024-allied-worlds-european-platform/

 

“Our growth is not just about expansion, but about strategic adaptation. I joined Allied World in 2008 and have witnessed an amazing transformation from a small team to a global force, with $6.5bn in gross written premiums, over 1,600 employees and 26 global offices.”

For the European operations, the focus has been growing the teams and the business in a measured, profitable way. 

[jeyfox]

Fairfax did a great job on improving the combined ratio since 2004 on all of its insurance entities.

 

[gfp]

Well not that it matters much but the newswires are showing that both RBC and BMO have increased their "price targets" for FFH.

 

RBC from $1085 -> 1200 ( I assume this is CAD and they aren't very bullish) USD, good for them

BMO from C$1550 -> C$1650

Edited February 20, 2024 by gfp

[SafetyinNumbers]

3 minutes ago, gfp said:

Well not that it matters much but the newswires are showing that both RBC and BMO have increased their "price targets" for FFH.

 

RBC from $1085 -> 1200 ( I assume this is CAD and they aren't very bullish)

BMO from C$1550 -> C$1650

RBC target is US$1200. It’s 1.1x their BV estimate. They leave their 2024 EPS estimate unchanged at US$140 and increase 2025 to US$152 from US$150. Maintain Outperform rating.

Edited February 20, 2024 by SafetyinNumbers

[Hoodlum]

7 minutes ago, gfp said:

Well not that it matters much but the newswires are showing that both RBC and BMO have increased their "price targets" for FFH.

 

RBC from $1085 -> 1200 ( I assume this is CAD and they aren't very bullish)

BMO from C$1550 -> C$1650

 

The RBC Target is in US$

 

https://www.theglobeandmail.com/investing/markets/inside-the-market/article-tuesdays-analyst-upgrades-and-downgrades-for-feb-20/

 

RBC Capital Markets analyst Scott Heleniak continues to see shares of Fairfax Financial Holdings Ltd. (FFH-T, FFH.U-T) as “attractive at current levels” following “solid” fourth-quarter results that saw “one of the company’s better underwriting results in recent quarters as well as strong dividend and investment income.”

“Reserve releases were above normal in Q4 at a time when some peers are seeing weaker reserving while core margins remained healthy,” he added. “Overall premiums were down albeit this was impacted by a few large non-renewals. Affiliate income was lower than in recent quarters. Share buybacks picked up in Q4 and the company recently raised its annual dividend.”

 

On Thursday, the Toronto-based firm reported net earnings per share of US$52.87, which exceeded Mr. Heleniak’s US$30.70 net estimate. He estimated Fairfax earned US$31.15 per share on an operating basis versus his US$27.70 forecast, citing its combined ratio as the main source of the upside.

 

“Fairfax’s Q4 P&C combined ratio was 89.9 per cent, its best combined ratio all year,” he said. “Reserve development for the quarter (2.7 points) was above the recent run rate with OdysseyRe, Northbridge, and Zenith National each generating double-digit reserve releases. NWP declined 5.5 per cent due to non-renewals at Brit and OdysseyRe. Fairfax is still seeing mid-single-digit insurance rate increases in its insurance book, which we believe is still outpacing loss cost trends. On the Q4 call, the company refuted the Muddy Waters short report and specifically took time to defend their stance on topics such as their investment in Digit Insurance, valuation methods for Level III investments (specifically for Recipe, Exco, and Quest), third party transaction protocol, and IFRS 17. We thought management did a solid job of addressing these topics.”

 

Maintaining his 2024 forecast, Mr. Heleniak raised his 2025 net EPS estimate by US$2 to US$152.00, citing “slightly better” premium and combined ratio assumptions. That prompted him to raise his target for Fairfax shares to US$1,200 from US$1,085, maintaining an “outperform” rating. The average target on the Street is $1,744.76 (Canadian).

 

“We believe the new price target is warranted considering our constructive underwriting and net investment income outlook for 2024 and given favorable multiples for P&C insurers in the sector,” he said.

 

“Fairfax’s underwriting units continue to deliver impressive results and its investment portfolio has likewise begun delivering improving returns as some of its associate/affiliate holdings are monetized. We would look for these things to continue as Fairfax’s insurance companies are well positioned to capitalize on improved P&C pricing and have a track record of opportunistic growth in such environments. Our thesis is that Fairfax’s long-term track record of double-digit book value growth will continue and the current valuation provides an attractive risk-reward entry point for those willing to back the company’s long-term investment track record. Fairfax has a deep cash position and ample access to capital, which gives it the flexibility to be opportunistic as well as patient.”

[gfp]

Thanks for the clarification.  I primarily use Interactive Brokers in the USA and I can never seem to find FFH.U (the US dollar traded Toronto shares) - does anybody else with IB have access to FFH.U ?  Fairfax India shows up no problem.

[SafetyinNumbers]

19 minutes ago, gfp said:

Thanks for the clarification.  I primarily use Interactive Brokers in the USA and I can never seem to find FFH.U (the US dollar traded Toronto shares) - does anybody else with IB have access to FFH.U ?  Fairfax India shows up no problem.

Why do you want to? FRFHF is generally more liquid although for both I would convert the FFH.to bid/ask before putting in an order.

[gfp]

14 minutes ago, SafetyinNumbers said:

Why do you want to? FRFHF is generally more liquid although for both I would convert the FFH.to bid/ask before putting in an order.

 

I usually prefer to own the actual underlying over a non-marginable OTC ticker.  I am fine with FFH in Canadian dollars (30% margin requirement for the most part, sometimes 50% since MW report).  But in US tax deferred accounts I buy FRFHF because I don't want to buy the CAD before each trade and can't borrow it.

[SharperDingaan]

Just to throw it out there ..... 

FFH might want to include an EV/Common Share valuation every quarter, starting with the AGM. First time out include the methodology, and drive it from the Statement of Cashflow (PAT approach). Provide the estimated maintenance capex, the WACC, and the growth rate. Refresh the estimates every 2nd quarter.

 

Multiple of BV is just the dominant industry comparable; change the framing, and you change the valuation. Run the company as a business, versus an investment, and EV is a lot more relevant; as management makes the key decisions that influence cash flow activities, WACC, growth, maintenance capex, etc. Evaluate management on what they do.

 

Nobody else does it .... yet. Put the EV/share out there and you'll get a lot of attention!, particularly when it is a lot higher than the multiple of BV valuation. Successfully defend it, and others will follow; the combined effort achieves critical mass, and the framing changes.

 

It's risky .... not. If the EV/share is 20% higher than the BV multiple, to discredit the approach a naysayer has to consistently and persistently argue a discount to EV/share of  > 20%. Hard to do, and if only 50% successful, EV/share is now 10% higher than the BV multiple; and it gets near impossible to do ... if EV/share becomes the industry metric. Fear is the mind killer here, not the approach itself.

 

The bulk of the industry is a handful of players, that all know each other. Should one trial it for a year, lets the market decide, and it works out; the 'impossible' could well occur a lot quicker than everyone thought! 

 

To quote the renowned Trooper song . " If you don't like what you got, why don't you change it? If your world is all screwed up, then rearrange it?" https://www.azlyrics.com/lyrics/trooper/raisealittlehell.html

 

SD

 

  

[SafetyinNumbers]

1 hour ago, gfp said:

 

I usually prefer to own the actual underlying over a non-marginable OTC ticker.  I am fine with FFH in Canadian dollars (30% margin requirement for the most part, sometimes 50% since MW report).  But in US tax deferred accounts I buy FRFHF because I don't want to buy the CAD before each trade and can't borrow it.

Makes sense, thanks.

[glider3834]

11 hours ago, jeyfox said:

Fairfax did a great job on improving the combined ratio since 2004 on all of its insurance entities.

 

cheers - you might want to also update with 2023 below

 

what does the Fairfax India CR relate - I assume thats not FIH?

 

Just with Allied, Fairfax recorded only half a year's premium in 2017 so that throws the combined ratio for 2017 and also warps the avg CR number as seasonally the cat losses are usually concentrated in 2H.

 

In terms of CR I would look at averages in 5 year increments as well as trend in underlying CR along with qualitative info eg over last 12 mths Brit has been significantly reducing its property cat exposure 

 

Edited February 20, 2024 by glider3834

[Parsad]

12 hours ago, jeyfox said:

Fairfax did a great job on improving the combined ratio since 2004 on all of its insurance entities.

 

 

Andy Barnard took over as head of all of Fairfax's insurance business in April 2011...look at the results the year he took over and then today!  His expertise as Odyssey Re's head is what helped change all of Fairfax's insurance business.  They went from ho-hum/poor insurers to world class!  Cheers!

[Thrifty3000]

When FFH reports mind-blowing results and the stock price drops...

 

[gfp]

24 minutes ago, Thrifty3000 said:

When FFH reports mind-blowing results and the stock price drops...

 

 

Weren't those the approximate results that we all expected?  Which may have been a major factor in the bull run preceding the earnings announcement?

 

Did you expect a worse Q4 than what was reported?

[Masterofnone]

Isn't it wonderful that they reported great results! Getting rich fast is terrific but pretty fast works too. The stock is 6% off all time highs with shorts still working on it. Relax and wait a few months...

[vinod1]

A different take on "If there is one cockroach..." is "if you find a few gold nuggets, you have probably run into a gold mine".

 

I think the more likely mistake we are likely to make is sell too soon. If it goes up to 1.5x tomorrow, selling out I think would likely be a mistake. 

 

The slower it revalues upward the better off we might be. I firewalled off a big portion of FFH into accounts just with very long hold periods that I would not need to touch. Active part with shorter hold periods moved to different account.

 

Vinod

[Gregmal]

The stock should be trading at ~$1300 USD with that figure increasing about $150 per share per year. Until it’s there, who cares about the short term minutiae?

[nwoodman]

21 minutes ago, vinod1 said:

I think the more likely mistake we are likely to make is sell too soon. If it goes up to 1.5x tomorrow, selling out I think would likely be a mistake. 

 

The slower it revalues upward the better off we might be.

This.  I want any forced decision making deferred as long as possible.  The current price +/- 10%,  growing around 1% per month , for the next 10 years or so, is fine.  If it turns out to be 0.25%/week even better. 

[MMM20]

On 2/17/2024 at 5:02 PM, StubbleJumper said:

I would say that what you are describing is the business.  The actual asset is the statutory capital that the insurance company maintains on its balance sheet, and it is that asset which enables the insurance company to write policies.  That definitely is an asset.  The float itself and the financing differential is the mechanism to generate profit from that statutory capital.  If you want to argue that $100m of statutory capital is actually worth $150m or $200m as long as the business is a going-concern, then I guess that's okay as it's akin to arguing that an insurer should trade above book.

Just wanted to circle back to this after ruminating on it excessively . I came to FFH from a “publicly traded investment vehicle” sort of lens and that’s still my primary framework. My sense after following the company for a few years is that for others with a similar perspective, the capitalized value of the structurally cheap borrowing gets overlooked - lost in the shuffle in the analysis despite being a big chunk of intrinsic value. Whichever way you approach it, it’s hard to see how fair value isn’t at least 30% higher and probably more like 50-100% higher - if not even well beyond that as @Hamburg Investor did a good job laying out.  
 

Edited February 21, 2024 by MMM20

[dartmonkey]

2 hours ago, MMM20 said:

My sense after following the company for a few years is that for others with a similar perspective, the capitalized value of the structurally cheap borrowing gets overlooked - lost in the shuffle in the analysis despite being a big chunk of intrinsic value. 

My feelings exactly. The difference between Berkshire's 1.5x book and Fairfax's 1.1x book is not so immense, until you consider that Fairfax has a huge float position and Berkshire has a relatively small one (about 130% of Fairfax's market cap, and 20% of Berkshire's.) Siince by definition float contributes nothing to book (it is essentially future insurance liabilities, along with present cash that can be invested), book is only part of the picture for Fairfax. Because of the huge float position, Fairfax is able to obtain a much higher earnings yield, which is why Fairfax is trading at an earnings yield of about 15% and Berkshire is more like 5% (when you back out the stock holdings and their income).

Edited February 21, 2024 by dartmonkey

[SafetyinNumbers]

6 minutes ago, dartmonkey said:

My feelings exactly. The difference between Berkshire's 1.5x book and Fairfax's 1.1x book is not so immense, until you consider that Fairfax has a huge float position and Berkshire has a relatively small one (about 130% of Fairfax's market cap, and 20% of Berkshire's.) Siince by definition float contributes nothing to book (it is essentially future insurance liabilities, along with present cash that can be invested), book is only part of the picture for Fairfax. Because of the huge float position, Fairfax is able to obtain a much higher earnings yield, which is why Fairfax is trading at an earnings yield of about 15% and Berkshire is more like 15% (when you back out the stock holdings and their income).

You both make great points.

 

We all have different assessments of intrinsic value but ultimately passive and active investors benchmarked to the S&P/TSX Composite and S&P/TSX 60 will determine where in the IV range we trade. I have personally made the mistake of selling too soon in a rerating more times than I can count because I was afraid of a drawdown. I’m determined not to let that happen again but I assume it will become more difficult once we are in the IV range especially for shares held in registered accounts where there are no tax consequences.
 

Currently, it’s easy to own or buy FFH given the set up. My current strategy is to wait until my forward ROE estimate is less than 10% to sell any. Because as long as it’s higher than that, FFH’s weight probably keeps going up in the index drawing in more institutional buyers.

[MMM20]

1 hour ago, dartmonkey said:

My feelings exactly. The difference between Berkshire's 1.5x book and Fairfax's 1.1x book is not so immense, until you consider that Fairfax has a huge float position and Berkshire has a relatively small one (about 130% of Fairfax's market cap, and 20% of Berkshire's.) Siince by definition float contributes nothing to book (it is essentially future insurance liabilities, along with present cash that can be invested), book is only part of the picture for Fairfax. Because of the huge float position, Fairfax is able to obtain a much higher earnings yield, which is why Fairfax is trading at an earnings yield of about 15% and Berkshire is more like 15% (when you back out the stock holdings and their income).

Right and by extension the best comp for FFH might not be BRK, MKL, WRB or IFC but actually an old school, early 2000s era Yale-backed LBO fund buying private businesses at like ~3x EBITDA with ~50% ring-fenced leverage on each position. That’s a different sort of structurally advantageous leverage profile but probably a similar risk/reward to Fairfax’s nowadays. I’m not sure how many people think about it that way.

 

Edited February 21, 2024 by MMM20